Work Backwards

Sometimes I hear from entrepreneurs, “Well, we are not sure how much we want to raise.”

So the obvious thing is… have a little conviction.  Know your business.  Know your goals.  Know your needs.  If, as the founder of the business, you don’t know what you need, then I as the person funding the business for sure don’t know.  And by the way, my level of confidence in you just went down. Oh yeah… and why would you sell more of your company at a lower valuation than you absolutely had to?

Hopefully you wouldn’t.  What I can do is give a little guidance about how you should think about what you need.  Besides management bandwidth, the most important input (at the beginning) is cash.  So managing the business from one cash inflow to the next is reasonable.  Let’s take an example:

Let’s say that a company is going to raise a Seed round.  How much should they raise?  After the Seed round, the next cash input will be the Series A funding.  Logically, the company should raise enough money to merit a Series A funding plus a little cushion.

What merits a Series A funding?  There has been a lot written about what VCs expect in order to lead a Series A.  You can Google that.  Or better yet you can personally ask VCs as you cultivate relationships in advance of the first priced round.  You should be getting to know VCs well before hand.  So ask them what it will take to merit a Series A funding.  When the time is right to raise a Series A and you return with the list completed it will be that much harder for the VC to say ‘no’.

For the purpose of this example, a Series A would be merited if the company has a working beta product and proof that either a sufficient number or a sufficient quality of customers would be willing to pay for the product.  The backfill is that the market is large, in need of disruption and you have some competitive differentiation.  We will assume that this is the case.

Okay. The amount of the Seed funding is enough to get the company from where it is today to where it needs to go in order to merit a Series A, plus a little cushion.  How much time does that take?  How much rent?  How much labor?  How much infrastructure?  How much travel?  Budget everything plus 20% more, plus a little cushion.

That’s how much you should raise and not much more.

If a VC wants to give you more, think about how that moves the bar of what you need to accomplish.  Think about how that effects valuation and timing of the next cash input.  Make sure that this is acceptable and achievable.

Work backwards.