The biggest fight I got into with two of my co-founders, Randy and Ken, was about how much money we should initially raise. I wanted to raise $11 million, and they wanted to raise $6 million.
Randy and Ken believed, incorrectly, that we would end up with more equity by raising a smaller round first. I’ll get back to why raising more money usually gives you more equity later in the video.
The fatal mistake of not raising enough funding.
Not raising enough startup funding is one of the most common self inflicted wounds you can give yourself raising startup funding. It’s a flawed thought process that raising less money is easier, but that’s not necessarily true.
Let me explain why not raising enough funding is fatal. It’s not because you’ll likely reduce your equity position more by raising less money.
It is because you’re not giving yourself enough runway. And that’s a killer.
When I ask founders why they want raise less money, the most common answer I get is, “It will be easier to raise less money.” The thought process is that it’s easier for angel investors and venture capitalists to write smaller checks.
And that is dead wrong. Here’s why.
First, Angel investors and VCs are usually extremely disciplined in their approach. So, they will use the same investing process and criteria regardless of the amount they are investing.
Second, raising less money means a shorter runway, so you’ll run out of money faster and you’ll accomplish less. In order to raise your next round of funding, you need accomplishments, be them revenue or technological, to justify the investment. How do you sell future investors that they should invest in your startup when you haven’t shown enough progress?
This leads to the next key question…
How much money should you raise?
Let’s go back the conflict I was having with Randy and Ken. They were convinced that we would have more equity by raising two equal rounds of funding instead of one round of funding.