How Much Should I Raise For My Business & When Pt. 1

Determining how much money to raise for your business is a function of several variables. Having more capital gives you more flexibility, but can be costly at early stages. Raising too little will leave you vulnerable to missing key milestones. The decision not only impacts the results of the business but your ownership of the business.

“Having more capital gives you more flexibility, but can be costly at early stages.”

There are several 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.

Aligning Interests. Experienced investors will be able to triangulate to what is fair for their effort while balancing the need to incentivize founders, management and employees for the risks and the extraordinary efforts required in building a valuable business.

Accepting More Money. if an investor is willing to give you an above-market valuation that allows you to raise more capital than you need without taking more dilution, it’s worthy of serious consideration. But even here, it’s not always a slam dunk.

Higher Scrutiny. With more money usually come more investment terms and more due diligence. The more money involved, the more more diligence to make sure that their money isn’t going to be misused.

Your Readiness. Be honest about whether you are ready to use someone else’s money. Do you have a plan? Have you recruited staff or put in place systems or processes to grow? Doing this before and not during or after raising money is a welcome step for investors.

Lack of Discipline of Extra Money. We need to look no further than the .com era to understand that when companies have extra money that they don’t need or have not planned for, they tend to spend without the rigor of a more capital constrained environment. This can come to life in the form of financial laxity, lack of focus, overspending by the management team and the general fear with overfunding a company is that it will be tempted to expand faster than it can absorb employees into the culture, integrate new systems, or expand real-estate needs without substantially disrupting the efficient operations of the company.