Sadly I encounter too many entrepreneurs (often first-timers) who want to raise capital too early and aren't ready to hustle to build value before going out for funding. The reality is - unless you have proven yourself either by having created value before (aka you're a second, third or nth-time entrepreneur) or you have actually created value - you will spend endless cycles chasing capital. And the capital you might be able to raise ends up being dumb capital as the smart investors will chase the entrepreneurs who have created value.
Being swamped with funding is a problem that most early stage companies would love to have. However, as an investor watching my portfolio companies and other start-ups in the market, I can see how large rounds negatively impact the culture of budding business. What’s the issue with too much funding? Here are four key drawbacks.
The question of when to raise money is one of the few times that entrepreneurs and early-stage investors have somewhat divergent economic interests. If you control a large investment fund, you always have the option to extend a company’s runway. The entrepreneur doesn’t have this option. I’ve even heard some entrepreneurs whisper about Machiavellian VCs who deliberately try to get you to the end of your runway so they can negotiate harder. I think this is a bit of a conspiracy theory. Almost all VCs I know care primarily about the success of their companies and not about extracting every last point of equity.
Raise too little money and you may go out of business when you run into trouble. Raise too much money and you may make less dough when you exit. Take your pick: disaster vs. dilution.
Stop saying: “If only we could raise money, we could do X.” Start saying: “If we do X and we’re lucky, we might be able to raise money.”
Build something (anything), put it in the hands of customers and get some traction before raising money.
"What is the right amout of capital to raise at a startup?” It’s a tricky question with no clear answer. There are trade offs. And it obviously depends on the kind of business you’re building. Any answer will be subjective and any real answer will just be explaining the tradeoffs to you.
As much as possible while keeping your dilution under 20%, preferably under 15%, and, even better, under 10%.
Short answer: enough to get your startup to an accretive milestone plus some fudge factor. “Accretive milestone” is a fancy way of saying getting your company to a point at which you can raise money at a higher valuation.
There is certainly such a thing as black-out days in venture capital. It’s worth you knowing this so you don’t waste your time. It’s also very important to understand so that you can properly plan when you raise money.
Impossible to define an actual number. My experience tells me that most individual angels like to write $25-50k checks for companies they really don’t know well. More professional angels seem to like to do $75-100k. Somewhat the amount you raise will depend on your needs, how much you’ve raised in the past and how much you think you can raise quickly enough. If it’s your first ever raise, many people try to go for $100-$250k because there are less people to ask for money. You can use this to get more product out the door, pay some staff and get your customer traction. Most larger angel rounds are in the $500-$750k range. Obviously harder because you either need a large anchor ($250k) or you’re talking about 10 x $50k people / 5 x $100k. If you’re less experienced I’d probably set a max of $250k on your first raise – but I want to emphasize that every situation is unique. I just wanted to provide some guidelines.
Most importantly, they split the entrepreneur’s and investors’ incentives – for the subsequent round, the entrepreneur benefits from a higher valuation, the investor from a low one.
First, figure out how much money you need to run at least two experiments. Then tack on 3 more months of runway so you can raise another round before you run out of money. This is the minimum amount of money you should raise.
Raise as much money as possible. With these caveats: (1) maintain control at any cost, (2) monitor your liquidation preference, and (3) act like you don’t have a lot of money. Also understand that if you do raise a lot of money, you will have to (1) “go big or go home” and (2) make a lot of progress if you ever want to raise money again. Alternatively, if you would rather maintain your exit options, at least raise enough money to run two experiments.
Convertible debt is often the best choice for a seed round. It is convenient, cheap, and quick. It lets you close the financing quickly and turn your focus back to your customers—that’s good for the company and its investors.