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50 questions: How much money should I raise?

By on March 9, 2011

Together with Nic Brisbourne of The Equity Kicker / DFJ Esprit, I am writing a series of 50 questions you should ask when raising venture capital. We expect the series to run for a year, after which we will collate the answers into a book. We view this as a collaboration, so please comment to help make this series even more useful. This is #15 in the series.

Entrepreneurs are often unclear about how much money they should raise in a round. There are two opposing schools of thought.

The first, let’s call it the “take the money” school, says “Fundraising is a time intensive process. It occupies the attention of founders and senior management; time that is better spent serving customers, developing products and running the company. Therefore you should always take the most that you possibly can, even at the expense of additional dilution.”

The second school of thought, “the anti-dilution school” believes that protecting your equity is the most important element of fundraising negotiation. It recommends raising as little as you need to retain the most value for founders and existing shareholders.

Both are valid points of view.

The “take the money school” also argue that, for an early-stage company, valuation is very fluid. If you are trying to raise £1.5 million or £3.0 million, you won’t see a vastly different level of dilution. An investor will, typically, look for a meaningful stake (say 15-33%); an entrepreneur won’t want to give up much more. So increasing the amount raised won’t necessarily increase the amount of equity you have to give away in direct proportion.

So how much should I raise?

This is, literally, the million dollar question. The first question you should ask yourself is “am I before or after product/market fit”.

If you are after product/market fit, raise as much as you can. You have identified a niche where your product satisfies a market need. You are writing orders as fast you can. You need money to scale, to hire staff, to expand internationally and to keep your market-leading position. (Of course, knowing that you’ve reached product/market fit is a challenge all of its own).

If you’re before product/market fit, you should be much more circumspect. I’ve already explain why too much money will kill a startup, but you should aware the pressures that come with raising a lot of capital. You have to staff up. You have to satisfy your venture capitalists demands for progress. You have less time to tinker with the product and business model and find yourself spending more time executing on the business plan. A business plan that may be flawed and impossible to achieve, but which forms the basis of your every action.

It’s impossible to give an exact answer. My answer would be “as much as you need to search for your business model.” At least 12 months with current burn rate. At least six months past projected break-even. Within those constraints, go for as little as you need, but, probably, as much as you are offered.

Ronald Cohen, of Apax fame, suggests raising enough money to achieve two, or preferably three, milestones. Each milestone should bring a valuation uplift for your next round, so this enables you to make progress, achieve a milestone and then go out on the next fundraise.

But if you’re raising more than £3 million without being confident that you have really found the market niche for your product, I think you are taking a big risk.

Hungry for more? Go to the 50 questions homepage for more insights into venture capital.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: