Founders: When Fundraising, Ask for More Than You Think You'll Need To preserve equity, fight for a higher valuation rather than paring back much-needed cash.
By Sam Hogg •
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?
