How much money should a startup raise? September 27, 2007

Some startups that I’ve met are not sure how much money they want to raise. Some think about raising money to last a certain period of time, others look to benchmark themselves against other startups and want to raise similar amounts of money.

There are a few schools of thought as to how to arrive at a target amount of money for a startup to raise.

Marc Andreessen says:

In general, as much as you can.

Without giving away control of your company, and without being insane.

Entrepreneurs who try to play it too aggressive and hold back on raising money when they can because they think they can raise it later occasionally do very well, but are gambling their whole company on that strategy in addition to all the normal startup risks.

Suppose you raise a lot of money and you do really well. You’ll be really happy and make a lot of money, even if you don’t make quite as much money as if you had rolled the dice and raised less money up front.

Suppose you don’t raise a lot of money when you can and it backfires. You lose your company, and you’ll be really, really sad.

Dick Costelo of Feedburner/Google says:

First, raise enough money to last about a year or a good six months after your next big milestone. Some people like to say “raise just enough to get you to and then you will be able to do a B round at a bigger valuation”, etc., but you want to give yourself some reasonable stretch of time to be product and strategy focused after the A round before you have to hit the road again to raise more money. It’s no fun having to think about starting to raise money again only a few weeks on the heels of closing the previous round. Second, you always need more money than you think you need, especially if this is your first startup. You can have a nice detailed spreadsheet that accurately reflects market salaries, rent, and more, but you will still require more money than you think.

In general, I tend to agree with Dick. Marc’s advice is good but raising too much money raises the possibility of greater dilution than necessary, and it may not be practical advice to entrepreneurs with a less stellar track record than Marc’s (which is pretty much everybody!).

Here is how I would advise a startup to think about how much money to raise:

1. Figure out what you’ll want to have done before you want to raise the next round. This could mean revenue targets, usage targets, product development milestones or whatever, but focus on a set of tangible achievements that you think will make your next round of financing easy to raise. These achievements should demonstrate a reduction of one of the three types of risk that VCs worry about (i) technology risk (ii) market risk (iii) implementation risk.

2. Figure out how long it will take you to achieve these milestones.

3. Figure out how much cash you’ll burn in this time. Do this carefully. With costs, you should be able to be pretty precise in your projections. Costs are mostly within your control (e.g. hiring) or variable to your achievement targets (e.g. bandwidth costs). However, be conservative in your revenue projections. These are not entirely within your control, and many startups miss their initial revenue projections.

4. Add enough cash to sustain six months of burn with no revenue to that time period. This is partly as insurance in case your development timelines slip (that NEVER happens, right! ;-)) and partly because raising money takes time. You should budget between one and three months between starting the process and having cash hit your bank account, more if you’re raising money over a period like the holidays when it might be hard to set up all the meetings you want.

This should give you a reasonable estimate as to how much capital to raise in your current round.