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How much should you really raise?
Founders often don’t have any idea how much money they should ask investors for. Here, I’m sharing what I’ve learned about raising funds over the last 6 years accompanying startups at The Family. So if you’re in the process of fundraising, yes, it’s a bit long - but take the 10 minutes to read it, it’ll help ;)
What usually happens when a startup raises $1 million?
They quickly increase burn to $100k/month. Then, with their newly hired team, revenue grows and burn reduces. The startup plans to become profitable after 12-18 months.
Yet this is the surest path to death.
The best companies keep the same decision-making process before & after fundraising.
They double down on what already works. After all, the company is exactly the same - it just has $1 million in the bank now.
Shipping new integrations brings new clients? Hire more engineers.
Your sales representatives close deals at predictable rates? Hire more of them.
While growing, you are setting up the foundations for your company. You have to be very meticulous about your first hires, your culture, your processes.
Great founders devote 80% of the money they raise to scaling and 20% to exploring new directions. They have two things in mind:
Scaling the current organization
Figuring out the missing link that will make their company legendary
They follow speed vs. efficiency rules:
They have a net burn that doesn’t greatly exceed their operating margin (see the rule of 40% for SaaS).
They double the team size every 6 months, maximum.
Deviating from these should be the exception, not the norm - especially in ecosystems with less access to capital and experienced talent.
The best entrepreneurs become master capital allocators.
Investors are capital allocators, too.
They bet on a few companies per year. Their job isn’t to decide if you have a good or bad business, but if you’re running the best business they’ll see this year.
Investors don't like risk, whether that’s market risk, team risk, or execution risk. What’s your plan to spend money better than anyone else, reducing risk while maximizing opportunity?
Start with what you need.
The most predictable part of building a startup is how much you spend. Most spending will be payroll.
Define what drives your growth. Is it product-led, marketing-led or sales-led? You’ll split your hires in two:
Those that add to the topline (to create growth)
Those that add to the bottom line (to sustain growth)
Write your assumptions down.
For example: $2K MRR per account exec per month; 3 months to fully ramp up AE; 3 months to find a developer, an experienced VP who knows how to manage 5 salespeople, a customer support rep for 10 clients, a second-time founder that already has a network that can be hired, etc.
Get your hiring plan for the next 18 months from those operational constraints.
Start with topline hires. That gives your revenue targets.
Total up your future losses for those 18 months.
Add 30% as a buffer.
Check that you haven't breached the speed vs. efficiency rules.
This operational plan is the cornerstone to your fundraising story, designed to convey trust and predictability.
Bring in the moonshots!
The first part of the plan is the inevitable. The second part is the impossible.
Build new features to move upmarket;
Test the waters of international expansion;
Launch in a new vertical;
Launch a consumer-facing product...
These are your high-risk, high-reward bets. It’s the Cash app for Square, AWS for Amazon. They won't all be capital-efficient, they won't all succeed. They should be a relatively small part of your expenses, though some investors might want to invest more to pursue them more intensely.
Understand your funding landscape.
In the US, there are so many startups and so many investors that the entire spectrum of fundraising possibilities exists. Want to raise $500k for a hardware startup or $100M for a crypto startup? Fine. In other ecosystems, it’s very different.
In France, for example, the early stage investment landscape looks like this:
€0-1M: almost nonexistent. A few small VCs + angel rounds.
€1-3M: crowded. All the European seed VCs (there are 30 of them).
€3-6M: almost nonexistent. A few seed funds and A funds that go out of their comfort zones.
€6-15M: very crowded. All the European A funds and some American A funds.
One lucky thing lately, though, is that COVID-19 and Zoom have dramatically expanded the potential for raising outside of your local ecosystem.
Stay true to your needs.
One common mistake is benchmarking your needs with the fundraising of another company. Even if you were to have perfect information about that company, you’re still running blind, only seeing the outcome, not the process. Do you think Roam went onto the market looking for a $9M seed round at a 200M valuation? They’d probably have been laughed at.
If you hit all the boxes, trust the process.
The investor's job is sourcing, picking and winning deals.
Make the job of picking easier for them.
Enter the market as a "good deal": a crystal-clear execution plan and opportunity at a fair price. Asking for what you need will maximise your chances of getting that first “yes”.
Treat every investor as a lead investor. They will have to choose between competing with your first yes or pulling back. Chances are some will compete.
Yes means Yes, No means No.
Turning a yes for €1M at 4M pre-money into a yes for 2 at 8 is common.
Turning a no for €2M at 8M pre-money into a yes for 1 at 4 is nearly impossible.
Because venture deals have power law outcomes, a yes means the investor believes your company can be worth $1B. They want to win, and they need to prove to the market that they are winning the best deals. They can leverage their brand or pay a higher price.
If you don't fit into some boxes, adopt high-resolution fundraising.
Don't change the plan to try to fit in. After all, it probably means you aren’t ready yet, operationally-speaking, to fundraise more. But don't let the market opportunity slip away - growth is the lifeblood of your startup. Raise what you need for the coming months. More money would only make you run longer, not faster.
Convertible notes have made the process way more flexible, and that kind of round doesn’t send a bad signal anymore. In Europe, only a few select companies manage to go from seed to A without raising some extra capital.
Don't optimize for dilution. Optimize for growth and you can become the attractive deal on the market. You could even skip a 25% dilution round.
A couple of principles to follow whatever happens.
Always choose people over valuations. The best investors are incredible advisors, having them can make or break your company. You are better off having a bridge with top investors than a full round with crappy ones.
If you raised 3 times more than your plan, don't spend 3 times more.
If you can achieve your business plan (topline & bottom line) in 6 months instead of 12, do it and go raise again sooner.
At The Family, we offer a global demo day to founders wherever they are. We are presenting startups to hundreds of the best investors, and we bring enough of them forward to cover the gaps in local fundraising markets. You’re welcome to apply now for our next remote batch in January.