Founders: When Fundraising, Ask for More Than You Think You'll Need
This story appears in the September 2014 issue of Entrepreneur. Subscribe »
When founders come to me for advice on fundraising, I always tell them to raise twice what they need and to plan on it taking twice as long as they expect. When I hear comments like "We don't need that much money," or "We're waiting to hit this milestone, and then we'll just raise again," I try not to roll my eyes.
One of the questions my firm always asks prospective companies is the rationale behind the specific amounts they're after, whether it's $1 million or $10 million. In many cases, the answer gives us a quick snapshot into a founder's startup experience. While we all appreciate capital efficiency, thinking small or staging rounds to preserve ownership is a huge mistake, and here's why.
Founders rightly obsess over severely diluting their equity at the earliest stages, but it is important to realize that two factors contribute to that dilution: valuation and dollars invested. Valuation has greater impact and can better align with the founders' long-term goals. For instance, if you had it in your mind to retain 50 percent ownership of your company, wouldn't you rather accomplish that by fighting for a higher valuation than by paring back much-needed dollars to preserve your equity?
Fundraising sucks, and it really never ends until the day you sell. Too often founders finish securing a round of capital after a year of hustling, only to find themselves back on the trail as soon as the checks clear. The process is expensive, too. Aside from the travel associated with pitching your company to investors scattered around the country, any financial transaction is going to involve fixed costs for legal services and accountants, and those costs will be the same whether a startup is asking for $100,000 or $10 million. Knowing that, it behooves every startup to ask for more money and delay the need to go back through the hustle for as long as possible.
The good news? We VCs think the same way. Our focus is always on the startup's valuation. And we have a doubly vested interest in reducing the time and costs associated with raising the next round of funds, since we also incur expenses, and if we invest, you are using our money to fund the search for your next round. In fact, you might be surprised at how receptive we are to fronting you even more money to help keep these costs of time and resources in check. We'd rather go bigger on a solid bet, so it never hurts to ask for more money.
For those of you still claiming you don't need the money or that you'll wait to hit a certain target, knock it off. Take every penny you can get while you have the momentum. What you might eat in diluted equity can be made up for in valuation and a lower cost of capital.
