The Considerations
Some believe that the answer to the question, “how much money should I raise? is “as much as you can.” But while we would all want to have unlimited capital to grow our companies, these decisions have implications on our ownership and the growth path of the business. So how do we determine how much to raise?
“These decisions have implications on your ownership.”
There are 3 considerations that need to be taken into account as you think about fundraising:
- The Cost of Capital. Venture capital is very expensive – meaning that you have to give up big pieces of your company to get it. Young start-up companies raise money before they have created much measurable or meaningful value, removed much of the risk, answered key questions about how big the market really is, defined how much market demand there is, proved if the product even works, or confirmed if the product has a concrete fit in the marketplace. As a result, the capital is priced with a high degree of risk assumed. Given that it is so expensive, you really don’t want to take any more money than you need.
- Control. With more investment comes the debate over control of the company. Generally, once you give up a majority of the ownership (i.e., equity) in the company, you have effectively given up the ability to control the company. This must be a consideration.
- Investor’s Desire for Ownership. When making an investment, investors assess the amount of risk involved, how long it will take the company to reach liquidity, and how much effort the investors will have to contribute to help the company succeed and scale. Those inputs then lead to a rough calculation of the amount of ownership that makes the investment worth making versus other opportunities. Generally speaking, the earlier an investment is, the more ownership an investor needs to justify the risk, effort, etc. Quality/experience of the team/entrepreneur, clear market analogs, and other factors can reduce that ownership need to some degree. So when an investor says they need such-and-such ownership (or they need to put $X amount of capital to work), it’s tied to their assessment of the risk and the reward.
Make sure you think about and are prepared to handle each scenario.
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