Hello, there!

Recently, I had the opportunity to meet a venture capitalist who runs a Seed and Series A $100m VC fund and has just led an investment round in a robotics fulfillment company, now boasting $10m in total fundraising. That conversation prompted a question ‘How much money should a founder raise from the investors?’

The answer is ‘well that depends’ but lets take a deeper dive into that to make it more actionable.

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Step # 1: Keep Your Eye on the Prize

When you're in the thick of growing your startup, you're constantly bombarded with questions like do people event want you’re offering, is it going to hard selling it, and, most importantly, can you actually do it?

Finding answers to these questions helps you reduce risks and build value for your business. Reaching key milestones along this journey adds serious value - these are your "value inflection points." Essentially, your money is the bridge to reach these points.

Step # 2: Identify Your Key Milestones

Value inflection points are those big achievements that make your business suddenly a lot more valuable to investors.

A value inflection point can be anything; landing a major partnership, hiring a key team member, getting your first batch of customers, or hitting an important revenue goal. Ideally, you should aim for just 2 to 4 of these major goals. And when investors ask if you can reach your goal within a year, you want to confidently say, "Absolutely."

Step # 3: Calculate the Cost to Reach Your Value Inflection Points

After you have identified your value inflection points, the next step is to calculate the cost it will incur to reach them. This is going to be your base amount. For example, if you aim to reach a certain number of customers, calculate what amount it will take to get there.

Also, don’t forget to take into account your working capital. The last thing you want is to go back to your investors asking for more money because you underestimated your needs. So, include a buffer for unexpected expenses or delays. The size of this buffer depends on how predictable your cash flow is and your team's experience.

Typically, adding 20-40% to your base amount is enough. If you're adding more than 40%, you might need to do more planning.

Step # 4: State Your Number Clearly

After adding up your base needs and your buffer, you will have a clear number to present to investors.

Don’t be ambiguous. Stick to your number and be clear about it. The final step is to make sure the amount you are asking for makes sense for your business's current stage. If it seems too high, you might need to adjust your milestones or find more cost-effective ways to achieve them.

Effective Tips that Can Help

Only Take What You Need

Don't ask for more money than you really need. It's like when you go shopping with a budget; you don't want to spend more than you have to. The more money you take, the more of your company you have to give away. And you want to keep as much of your company as you can, right?

Plan for the Next 1.5 to 2 Years

Think about how long the money should last. You should have enough to keep your company going for about 18 to 24 months. Less than a year is too short; you will barely get anything done before you need to ask for more money. And if you plan for more than 2 years, that's a bit too far ahead to guess what you'll need.

Be Realistic

Make sure your plans for your business are believable. If you are dreaming too big without showing how you will get there, people won't take you seriously. It's like saying you will climb Mount Everest next week without any training—it just doesn't make sense.

Craft a Compelling, Yet Pragmatic Story

Your pitch to investors should be a narrative that weaves your ambitions with practicality. It's about showing how your vision aligns with achievable milestones and demonstrating a clear path to profitability or the next significant growth phase.

This narrative should resonate not just with your own aspirations but also with the pragmatic considerations of your potential investors.

Learn from the Pros – Case Study

Buffer's Transparent Approach to Fundraising

Buffer, a social media management tool, took a uniquely transparent approach to fundraising. The company publicly shared its fundraising pitch deck and the reasoning behind how much it decided to raise. Buffer aimed for an 18-month runway, raising just enough to hit their next growth milestones while meticulously protecting their equity.

Their strategy was to ensure they had enough capital to sustain growth without overextending themselves or diluting ownership too early. This approach paid off, as Buffer successfully navigated through its growth phases, maintaining significant control and eventually moving towards a profitable model.

To Wrap It Up

Raising capital is a critical step in your startup's journey, one that demands a strategic approach and a keen understanding of your long-term business goals.

Remember, the goal is not just to raise capital but to do so in a way that positions your startup for the future you envision. Let this guide serve as your compass in navigating the complex yet rewarding landscape of fundraising.

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