Via LinkedIn : If you were to ask me how much money your startup should raise, I could give you a simple answer: raise no more than you need to reach product/market fit, for example, or enough to validate your business model. But this subject is too important for simple answers, and there are constructive tensions at play – entrepreneurs want ownership and control, while investors want a return on their capital.
Instead, let me suggest 4 possible answers to how much to raise:
- No more than you need
- As much as you can get
- It doesn’t matter
The above answers are right AND wrong. Read on to understand why, and learn about which of these might be right for you.
Zero until you’ve thought through things like:
- How to invest it?
- Where it will take you?
- A vision for how it will generate a return
- Your own ambition and risk profile
- The expectations and obligations of investing Other People’s Money
These last couple of points are key. If you’re not ambitious and can’t tolerate risk, step back, choose a very realistic goal, accept dilution, and raise more than you need to provide yourself a cushion for all of the above unknowns. If you’re an ambitious risk taker who can live close to the edge, minimize dilution by raising the least amount to show the huge potential of your opportunity. And once you take Other People’s Money (OPM… sounds like opium – remember that) it can be like a drug; easy to try, tough to handle if you don’t know what to expect, and very difficult to get off if you’ve taken too much. (Tweet this)
Bottom line: Don’t raise money at all unless you’re ready to make the tradeoffs both personally around lifestyle & responsibility and professionally around ownership & control.
No more than you need
Smart entrepreneurs often formulate the amount they raise based on what milestones they can achieve to increase their valuation, and raise no more than they need, therefore minimizing dilution. Meanwhile investors are also looking at the risk they take at each stage based on unknowns and discount valuations accordingly. A constructive way to look at this from both viewpoints is represented below.
Using this as a basis for discussion, raise no more than you need
To reduce risk and earn an increased valuation for your next fundraising
For the particular stage of your business (For example, to confirm you have established a real need for your product)
To reach the next critical milestones ahead of you (Such as confirming you have established an initial customer fit and use case)
In the above diagram I often see entrepreneurs confuse product / customer fit with product market fit. They are very different. Even if you’ve got a few customers using your product it doesn’t mean you’ve got generalized product / market fit until you’re seeing your product meet a consistent set of customers’ needs in a repeatable manner without distracting customizations for each one.
Without this, overfunding is like overfilling an out of control car – at best you’ll burn rubber skidding around the market and at worst you’ll spin out of control, and crash and burn with all that excess fuel. Instead, take time on both minimizing your initial product AND target market segment using the MVP and MVS (Minimum Viable Segment) frameworks.
Once you’ve hit Product / Market fit and or Company / Business Model fit, it might be time to step on the gas and raise as much as you can get.
As much as you can get to
- Prove repeatability and Scalability in your business model
- Attain the unfair advantage that can be derived from becoming a market leader and write the rules for others to play by
- Ensure you have long enough cycles of action to actually build your business before having to be distracted by fundraising again. (Typically 18 month cycles)
- Attract *the best* talent to fit your team – human capital is the most important capital you’ll raise.
- Manage through the unexpected
- Exceed expectations of your team, customers, partners and investors
Yet behind all this there are many key judgements to be considered.
It doesn’t matter unless you …
- Understand what you personally are uniquely qualified for?
- Are self aware enough to know who to invest in hiring to complement you
- Know if you want to be Rich or King?
- Have a vision for your market
- Understand what role you want your business to play in the ecosystem / value chain
- Eventually replace funding with revenue, free cash flow, and profits
Ultimately the BEST form of funding is a customer repeatedly paying for, growing the use of, and praising your products and services as a reference (Tweet this). Don’t fall for a “Money Mirage”. Revenue and referrals trump dilutive funding, as long as you think through your business model.
Nothing will provide an accurate idea of your funding needs if you don’t know your business model and your intentions in the ecosystem. Are you the scientist/inventor who will license your IP, the designer and builder of your products or just the operator of other’s products? Or are you the supplier or supporter of them, or some combination?
These days, business models are potentially as disruptive as technology (Think Google vs. Microsoft) and as differentiating as commerce itself (think eBay vs. Amazon). Allow enough capital to both test and validate a business model as part of your journey. For example, B2C advertising, B2B SaaS, or subscription business models have great appeal but may require ~2-3x more funding to reach cash flow breakeven depending on how you design them.
Does this all matter so much?
To come back to the original constructive tension, capital planning and funding strategies are vital because planned correctly they meet everyone’s needs to realize the full potential of your business while building great value and exceeding expectations. And the reverse is also true as shown below.
Dream big, invest your life. You only get to turn dreams into reality by funding them appropriately to make your customers successful. But remember, while investors invest real dollars which they expect to get back with an appropriate return, you invest your life, which you can never get back. So invest wisely and use funding vectors to think at least one step ahead.
This article is only a sample of the significance of this subject. See here if you’d like a practical roadmap to “funding strategies to go the distance” including a video and slideshare from the Harvard iLab Startup Secrets series.
Michael partners with entrepreneurs helping them from inception to company to market leader. As a VC, Michael has backed and built teams that have created billions of dollars of value while focusing on large, market-changing technologies and disruptive business models such as SaaS, Cloud Computing, Open Source and Mobile. Current representative investments and board seats nclude Acquia, Cazena, Demandware (NYSE:DWRE), and Salsify.