Over the past couple of years, a narrative has existed in the startup community that has led founders to believe that to succeed you need to grow at an irrational pace and to grow quickly you must raise monster rounds of venture capital at “unicorn” valuations. Based on my experiences that’s not sustainable and it’s not true.
Being thoughtful about the amount of money you are raising and at a valuation based on growth metrics will get you much farther in discussions with venture capitalists. It will also provide a greater degree of freedom, as it relates to your options for exits and future capital raising.
Before you set out to fundraise you need to determine the right amount of capital at a reasonable valuation. The answer is definitely more of an art than a science and no two situations are the same, but as a venture capitalist I’ve been pitched by hundreds of startups and have seen and heard from companies asking for too much, too little and everything in between.
Below are my tips and guidelines when raising money:
1. Do you need venture capital?
Venture capital is not always the right kind of investment for every business -- or perhaps it’s too soon for venture funding.
Do your research, there are more ways to fund your business than ever before. For example, a small business like a bakery is likely better off with a SBA or bank loan. Recent equity crowdfunding rules have also made it easier for companies to raise money from anyone interested in investing in startups. The most important thing to consider when raising VC money is the size of your market. This number should guide you towards how much money you need to raise.
2. What phase is your startup?
Carefully consider the stage of your startup and where you hope to be in the next one to two years. While it’s important to have a long-term vision of your business, in the early stages it’s all about executing on the limited set of milestones and deliverables you’ve promised to your investors. It’s the best key to securing additional capital.
3. How will you use the money?
Raising too much capital too quickly can be a bad strategy for an early-stage startup without a clear plan to deploy the capital in productive value-creating ways. Tying this use of cash with a set of clear milestones is critical to articulate in your pitch to prospective investors (“We’ll hire X salespeople and invest $Y in marketing to produce Z results”)
The industry your company is in matters. For example, an internet-based company might not require as much cash as a hardware company. Or if you’re operating an ecommerce business you will have more inventory, which requires more upfront capital than a software company. And VC’s aren’t immune to investing around hype, like the recent “Uber for X” trend.
4. What does the VC market look like?
Consider the macroeconomic environment and factor that into your long-term planning. If there is less venture money in the market you would be wise to raise more money once instead of having to return to the market to raise more money a year later.
Finally, recognize that raising money is time consuming work and the leadership team needs to make time for building the business, too.