You Need To Raise More Money Than You Think

“How much money are you going to try and raise?” I asked “Sarah.”

“I’m thinking we should raise $1.5 million this round,” Sarah said to me.

“How long will the money last?” I asked.

“I’m not sure,” Sarah said. “I’m waiting on my fractional CFO to give me the data.”

You need to know how long your funding will last before you raise money.

I sighed. “Okay,” I said. “Let’s see if we can come up with a reasonable guess. How much money do you think you’re going to burn, after you calculate your revenue and your expenses, each month?”

“I think it will be around $150K per month,” Sarah said.

“All right. Then, your funding is going to last around 10 months or so. In my humble opinion, this isn’t long enough.”

Asking for too little funding can make it harder for your to raise funding.

“What do you recommend?” Sarah asked me.

“You have two choices. You need to make your funding last for at least 18 months, ideally for 24 months. Let’s start with that…”

Sarah interrupted me, and asked, “Why’s that?”

“Raising money typically takes around six months, but that’s a typical number. It can take longer, maybe even a year. Hell, it took me two years to raise money.

“So you want to give yourself a buffer. That’s why I recommend making sure your funding lasts at least 18 to 24 months,” I said.

“Plus, VCs know that it can take six months to a year to raise money. So, in their eyes, you’re increasing the risk of not being able to raise that next round of funding if, this round, you don’t raise enough money.”

“Oh, I thought I was making it easier to raise money by asking for less money,” Sarah said. “But it’s the exact opposite.”

“Exactly. Now back to the two choices I said you have. You can keep your ask at $1.5 million, but you need to reduce your burn to make the money last at least 18 to 24 months.

“The other option is increase your ask to around $3 million.”

There are trade-offs regarding how much money you should raise.

“Or, I could wait and raise $200,000 from angels,” Sarah said. “But, I’d have to dramatically cut back the team and our projects.”

“Yes, that’s another way you could go. Are your existing investors willing to pony up more money?” I asked.

“Yeah, I’ve already talked to them,” Sarah said. “They definitely want to invest in the next round, so that gets me $200K.”

“Got it,” I said. “Would you do it as a convertible note tied to the next round?”

“Yes, that’s what I was thinking,” Sarah said. “What do you think I should do?”

“Well, since you asked, I would absolutely raise the $200K right now, since you’re going to need that money anyway. I think that’s the easy decision to make.

“Then, I’d raise the $3 million. In my simplistic view, you’re almost always better off raising more money, not less money. So I’d increase my runway as much as possible.”

“That makes sense,” Sarah said.

Three months later, Sarah closed her $3 million round. Good for her!

For more, read: https://www.brettjfox.com/the-nine-facts-of-fundraising-you-need-to-know/

I work with startup CEOs to help them grow their businesses . I built several businesses from $0 to >$100M. Learn more at www.brettjfox.com

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