Nivi · October 27th, 2010
We get this question all the time and there’s no right answer. So I started a discussion on Quora to learn more. Here’s my answer:
Raise less if you want to keep your valuation down and keep the option open for an early exit where everyone (investors, employees and founders) makes money.
Raise more if you’re here for the long term and you want to protect your company from poor funding environments or hiccups in your growth. Just try to maintain control, monitor your liquidation preference, and monitor your dilution. Also understand that, if your valuation is high in this round, you will have to make a lot of progress for the next round to be an up round.
In summary, raise too little money and you may go out of business when you run into trouble. Raise too much money and you may make less dough when you exit. Take your pick: disaster vs. dilution.
In either case, try to act like you don’t have a lot of money. The conventional wisdom is that when you have a lot of money, it’s hard not to slow down because you start spending it (which takes time in and of itself) and you start thinking that you have a lot of time left before you die, so what’s the hurry?
Read the rest of my answer on Quora. Also see this old post on Venture Hacks for related quotes from Eugene Kleiner, Bill Janeway, and Marc Andreeessen.
Topics Dilution · Future Financings
Is it common practice to use startup funding to live off of or is the expectation that you are solely existing off of savings?
Think about it from the other side. If you are able to live off savings then you get to raise less. If you’re doing a small round, this could be a significant % difference in the capital you’re seeking. This might be a good approach if you want to keep the valuation down and limit dilution.
If you’re raising a larger A round in the millions, and you want three years runway, including salary for one more full time staff (you) isn’t going to be a massive % increase of the total round.
If the investors are insistent that they will only invest if you live off savings, and thats something you can’t really do, I’d question the relationship. Mark Suster tweeted it earlier today: “If a VC doesn’t show flexibility at the time of their investment (when they love you most) imagine how they’ll be in your darkest hours”. (http://twitter.com/#!/msuster/status/28918035922)
Reality is reality, and if a VC is presented with an awesome team, and awesome market fit and a kickarse ability to execute, they’d be silly not to invest just because you need a salary.
Thanks for the insight. Those are good points.
Your Quora answer is spot-on. What does less vs. more mean, in terms of dollars to be raised? In the medical device startup world, we think of four categories of funds to raise:
1. Operating funds – what you think you will need to get to your next funding milestone, based on your financial plan.
2. Runway funds – what you will need to continue to operate, beyond your operating funds, while you raise your next round.
3. Contingency funds – what you will need to recover from unplanned event (e.g. pre-clinical study didn’t go as planned and you will need to do 3 more months of work)
4. Opportunistic funds – funds to enable you to take advantage of unplanned opportunities (e.g. licensing some cool new technology).
1&2 are necessary; 3&4 are up to the team. So 1+2 = “less” and Sum[1:4] is “more.”
I surfed over to Quora and enjoy the site. Could you comment on any concerns you have over the level of access Quora requests to your Facebook account? Is there no other way to join (I plan to not have a Twitter account).
Living off savings in any major metropolitan area (like the bay area) would be challenging for most. I think most rounds must include some “reasonable” base pay for founders assuming they work full time on the startup. Working “part time” on the startup might yield a lower round dollar amount. Only after a thoughtful and honest financial assessment of what is actually needed (hosting, services, dev, office, salaries) by the entrepreneurs themselves can they see exactly what would be a low round or high round. At this point, a real conversation can be had with investors if more is needed. Or, if they are really honest…less.
Disaster versus dilution: that’s a nice summary of the predicament.
Most of my clients right now are just hoping they can raise anything at all. I work with clients to create more effective business plan executive summaries to submit to potential investors, but the challenge is still, “How do I get this in front of the right person?”
I think that in this environment most would take a lot, a little or anything in between that might jump start their company and take it to the next level.
We offer executive summary guides, examples, templates and more, but in your experience in the VC world. Do VC’s really care? There are lots of great ideas, but not so many dollars. What is the key to getting in front of a VC or angel investor?
I have a short video on money raising which your fans are likely to appreciate:
http://smartstartup.typepad.com/my_weblog/2010/11/how-to-raise-startup-capital-or-not.html
This will help you how much you There’s a financing model for every entrepreneur out there and depending on the type of business you have, there’s an optimal way to fund it. If you Funding for Small Business, then running it out of your house using your own savings, credit card loans, and eventually your own revenues may be enough to keep it going. If you have bigger ideas and more ambitious aspirations, then you may want to consider other ways of injecting fuel into your business.