5 things to consider when asking “How much money should I raise?”
This is a question that comes up all the time in a startups life: “How much money should I raise?” Many believe the answer is simple: raise as much as you can. But I personally don’t believe this is the correct response. Sure, more money seems like a better option. If you raise too little, you risk running out of cash before you achieve the milestones needed to go back to investors again. But if you raise too much, you could give away an unnecessary equity stake of your company.
So, I will attempt to simplify this as much as possible and give my advice to the very complex question of “How much money should you raise?”.
- Have a goal.
Your first real task is figuring out what you need. This should be based on a financial plan. I believe that a good goal should be to raise as much money as needed to get to your next “fundable” milestone. This milestone is usually reached in 12–18 months. Fund the milestones you believe are necessary to reach a significant inflection point; this could be sales, KPIs, OKRs, Profitability, Positive Unit Economics, amongst many other. Asking for more than 2 years worth of capital is likely to be a red flag to experienced investors. Coming up short is a huge mistake, and is usually why people say “raise as much as possible”, as it will almost always cost you even more than the original capital.
In DILA we want to evaluate how much cash you’re raising and whether this amount is realistic. We want to know how long the money you will raise will last and whether this is long enough to warrant taking a risk on funding your endeavor. We want to know what you expect to accomplish with this money in order to evaluate whether those milestones will be sufficient to raise the next round.
2. Know how much equity you are willing to give away.
It’s all about dilution. Common sense says that less dilution is always better, but this is not that straightforward. Sure, less dilution is better, but that is assuming you don’t need money. Assuming you do (and that is why you are reading this post), dilution is a two variable equation: money raised divided by valuation. The money you raise early on is going to be the most expensive money you ever take, so be careful how much you take. The more you take the more you will be diluted.
In DILA we invest in pre Series A and Series A rounds, and as a general rule of thumb we don’t like to see founders with less than 70% of their companies. Our rounds usually buy 20–30%, so founders still have a majority stake post our investment.
It is important to note that your company’s valuation is not a factor of how much you raise: the value is what it is. So, in general, the more you raise, the more you will be diluted.
3. Be disciplined.
Having too much money could be a bad thing. You can lose grit, nimbleness and scrappiness. Having more money than you need may cause you to overspend and/or make bad investments. So, even you do raise more than you need or expect, keep the lean mentality, don’t assume because you were able to raise now you will have unlimited funding in the future.
With that said, its important to put the money to work. We have seen many companies raise cash and be too cautious and conservative and then not obtain their milestones because of this “safety strategy”.
So, be disciplined and scrappy, but don’t hoard your cash.
4. Generate FOMO.
How much you ask for is not necessarily how much you get. In general, VCs are attracted to deals that seem to have high demand. Having too little demand leads to bankruptcy. Having high demand, generates FOMO (Fear of Missing Out) and FOMO generates more demand. All investors say they dont have a herd mentality, but all investors are interested in “hot deals”, so do everything you can to create FOMO and become a “hot deal”.
5. All things being equal, more money is better.
If you generated FOMO with a good plan, it is probable that investors are willing to give you an above-market valuation that allows you to raise more capital than you need without taking more dilution. This is definitely worthy of serious consideration. Having more money than you need allows you to focus on operating the business rather than raising capital (remember that raising capital is a full time job).
However, be cautious of an overly optimistic valuation. Your valuation today will dictate your valuation tomorrow. One of the worst things that can happen in your storytelling is to have a down-round (a valuation at a lower price than the one in the previous financing round), so be sure your valuation makes sense.
To conclude . . .
To sum things up, my advice is to have a clear use of funds, backed up by a solid plan. Ask for enough money (knowing that what you need includes a buffer in order to get to your next fundable milestone). Know who you are pitching to and make sure you raise the capital you really need to last you 12–18 months. Make sure this amount allows you to hit milestones to raise your next round. Once you raise your round, be disciplined in your investment approach. Keep your investors close.
Hope this helps. Any questions please comment below or email me email@example.com