One of the biggest questions facing any entrepreneur is how much capital to raise for their startup. It’s a delicate question…one that can have a significant impact on the fate of any startup. Raise too much and you’re diluting your ownership; raise too little and your company will have trouble gaining traction or making it to the next month.
While every investor tends to offer different advice on the topic, most will agree that there’s no magic number that applies to all startups and situations. There are multiple factors you need to consider, including what you’re trying to launch. A SaaS startup with immediate monetization options usually needs to raise way less capital than an advertising-driven business that can generally only monetize once it reaches a certain scale.
Yet while there’s no magic equation, here are three things to consider when trying to determine how much capital to raise:
1. Raise enough to sustain your company for at least 18 months
If you have the option to do so, raise enough capital for a minimum of 18 months. Fundraising takes an enormous amount of time and energy, from meeting with potential investors to honing your presentation. With a small round, you’ll end up thinking more about future funding than developing your product.
Many new founders think that because they’ve secured their seed round, it will be easy to find investors for the next round, and the next… However, a startup needs to demonstrate significant progress between funding rounds. By raising enough funds to give your business 18 months of runway, you can spend a whole year building your product and reaching milestones before it’s time to get back to fundraising.
2. Target between 15-25% dilution per round
I typically recommend that founders put more emphasis on the quality of investors (i.e. how can they help your business grow) and how quickly you can close a funding round (so you can get back to work), rather than focusing solely on dilution levels. However, you still want to target a reasonable amount of dilution as a goal and 15-25% per round is usually a good benchmark.
3. Keep funding to a minimum until you have found a product-market fit
Early rounds are particularly expensive, because company valuation is low. For this reason, you should try to raise as little as possible until you find a product-market fit. Once you can show traction, with scalable marketing and sales channels, you can get vastly superior valuations. Until then, try to keep your funding to the minimum of what you need.
Unless you’re able to bootstrap your startup until you reach profitability, you’ll need to raise money at some point in your company’s lifecycle. Deciding on the right amount of funding is a tricky question with no single right answer. However, keep in mind that the majority of failed startups end up closing their doors because they run out of money. Take the money, but do it wisely.
- Fundraising, Valuation and Accretive Milestones (startupnorth.ca)