How Much Money Should You Raise?

“We should be raising a $6 million round, not $12 million,” “Randy”, my co-founder, said to me. In fact, Randy was so angry about the terms of our funding that he was threatening to quit.

Picture: Depositphotos

“Let’s meet, so I can walk you through why we are better off with the larger amount of funding,” I said. So we arranged to meet Thursday for lunch.

I developed a spreadsheet in preparation for our meeting, so Randy could see why we were better off taking more money now instead of breaking our funding up into two rounds of $6 million. My goal wasn’t to trick Randy, but to educate Randy.

Randy seemed in disbelief as I showed him the various examples. Randy had never bothered to work through the math.

If you can skip a round of funding, you should.

The increase in the number of early stage funding rounds are designed to reduce investor risk. If the sequence is an angel round of ~$200,000, followed by a Series A of $2 million, that is then followed by a Series B of $10 million, you will be diluted at three instances.

If you assume a typical 20% dilution for each round of funding, you will be diluted to 51.2% (0.8 x0.8 x 0.8) ownership by time of your Series B. That’s a lot of dilution.

But if you can find a way to skip one of those early rounds and get enough traction to get to a larger funding, then you will end up with more of the company. That’s in essence what we did.

You should figure out how much money you need to get to cash flow positive.

But round skipping has nothing to do with knowing how much funding you need.

My goodness, don’t you want to know how much money it’s going to take to get to cash flow positive? It’s even more important to know this number if you’re bootstrapping because you’re running on a very limited amount of funds.

Your initial estimate will probably be wrong. In all likelihood, you will estimate that it will take less money than it will in reality to get to cash flow positive.

Let’s say you estimate, when you start your company, you need $20 million to get to cash flow positive. It’s doubtful that…