19. Raising Capital: Why you need more money than you think
When you are raising funds for your startup, one of the biggest questions is, How much should I ask for? You can’t get all the funds you will ever need all at once because nobody would give it to you, and at your early stage valuation you would be left owning almost nothing anyway. This is why funding is done using multiple rounds.
As a founder, you can maximize your ownership by taking as little money as possible in each round. Money raised later ought to be at a higher valuation and thus create less dilution. Because of this I often see founder try make their seed rounds entirely too small.
Raising more money than you think you need will give you some time away from fundraising to actually work on the business and achieve your milestones. In reality, these rounds almost always take much longer than you expect. In many cases, there will be multiple rolling closes over eighteen months or more. Just like this round, closing the next round will also take longer than you expect. If your plan provides cash for just three or six months past when you will start working on the next round, you will probably run out of money before you complete the raise.
Running out of cash is the ultimate sin. It means you have absolutely no negotiating leverage and are almost certainly going to get screwed by the next investors.
Because “A” rounds are much harder to close than seed rounds, entrepreneurs frequently need to do multiple bridge rounds before they succeed. Having enough cash up front significantly reduces the amount of time spent talking to investors later.
As an investor, I worry when it looks like a funding round is too small. I doubt that you will be able to prove out your next deliverables and hit your milestones with just this money. If not then there are three unfortunate possible outcomes.
I will be forced to invest more, even though I don’t want to, just to keep the company and my investment alive at all.
The company will fail and I will lose my investment.
The company will have to raise additional funds after missing its milestones and be forced to accept a down round that will crush my investment.
Those worries are often enough for me to pass on an investment opportunity entirely.
My advice is simple, raise more money than you think you will need (within reason). It is very likely that you will take longer than expected to hit milestones and you will end up spending more cash than planned. You still want to get to the next round with money in the bank and in a strong negotiating position. You will experience a little more dilution this way, but be much more likely to create a big successful company in the long run. You are trading a big percentage of a small pie for a slightly smaller fraction of a much bigger pie.
Focus on that big pie.
