TLDR

  • Have a plan - Know what you need the money for and how the money you raise will be spent. Investors will want to see that you have a clear plan on what you will be using the money for and how it will help your startup reach its next milestone.
  • Runway - Ideally, you want to raise enough so you can reach a point where you never need to raise again. This is not normally the case for most startups however. Therefore aim to raise enough to give you 12-18 months runway.
  • Ask for advice - Don't be afraid to ask investors what they think you should be raising.

Many people say that you should raise as much as you can, but this is a flippant answer that can lead to several problems. More does not equal better.

When it comes to raising capital for your startup, you want to raise as much as your startup needs to reach significant milestones. This means that before you even consider putting a number to how much you want to raise, you need to think about what your next one to three milestones are. What objectives are important to your startup? Is it delivering a MVP, reaching a certain MRR/ARR, or hitting a certain number of customers?

Plan

You should only consider raising money and decide on how much to raise once you know what you want to achieve with said money. This is important as the money you are asking for should be tied to a plan. Having a plan will help you gain the credibility needed to persuade investors that the money they invest will grow and provide them with a return. Having a plan and achieving the milestones within this plan also increases the value of your company, without which, you will have trouble raising another round.

Runway

When deciding on how much to raise, you ideally want to raise enough to let you reach profitability, meaning you’ll unlikely need to raise again. Some startups will, however, need additional rounds and so, in these instances, you should aim to raise enough that will allow you to reach your next fundable milestone, typically 12-18 months, and convince investors that reaching such a milestone is a good use of money.

Any shorter than 12 months and it will be hard for you to hit the key milestones that highlight the traction needed to justify any future round valuations.

Ask  

It can be helpful to engage with investors to discover how much they think you will need based on their experience and knowledge. (It is worth noting that investors from different locations may look at this issue differently).

A simple, but by no means comprehensive, calculation to estimate how much you need to raise is to look at your current monthly expenditure or burn rate, factor in marketing and developing costs and the team members you plan to hire. Multiply your new monthly burn rate by the number of month’s runway you want (aim for a minimum of 12) and remember to include some buffer to cover any unexpected costs that might come up.

When communicating the amount you are raising to investors, do not use the above as your explanation. Justify the amount you are looking to raise by citing the milestones you want to hit, not the monthly burn rate you need to survive. Don’t tell investors how much you want, tell them what your milestones are and what reaching them will cost.

Don’t forget to bear in mind that you will be trading off several variables when deciding on the amount you want to raise. These include the degree of progress the money will afford you, dilution and credibility amongst investors.

“At our stage, we advise founders to look at the metrics they would need to demonstrate product-market fit. We would then suggest a raise amount that would allow them to reach those numbers within 12-18 months. We suggest a minimum runway of 18 months.”

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