Entrepreneurs often struggle with trying to figure out how much money they should raise. Unfortunately, there typically isn’t a scientific answer. However, there are a number of discernable incentives that influence entrepreneurs and VCs, driving the amount of capital you should raise. Taken in aggregate, these considerations should help you determine a reasonable amount of capital to raise.

Incentives that impact entrepreneurs:

• Avoiding bankruptcy: Entrepreneurs have an incentive to raise a little extra money to create a cash ‘buffer’ that will reduce the odds of them running out of money if they face unexpected challenges (e.g., legal expenses or slow fundraising in the future).


• Achieving milestones: An entrepreneur needs to raise enough capital to demonstrate achievements that will position him to raise his next round of capital. For some companies, these milestones will be developing the product, for others this will be generating revenue.


• Minimizing time spent on fundraising: Most entrepreneurs hate raising money. There’s good reason for this: it takes a lot of time to manage the process, engage in tons of meetings and support the diligence process. As a result, an entrepreneur has an incentive to raise as much money as possible in his current round to avoid investing time in fundraising in the future.


• Minimizing dilution: Counter to the incentives created by the need to achieve milestones and minimize time spent on fundraising, an entrepreneur generally benefits from raising less money in his first round. Raising capital for the company in stages allows the company to increase in value between rounds, increasing the average valuation applied to the company across its various raises.
  
  To illustrate the point, here are two simplified scenarios. Assume the company needs a total of $10MM to get to an attractive exit. The entrepreneur can either: 1) Raise $20MM at a $10MM pre-money valuation and sell 67% of the company, or 2) Raise $5MM at a $10MM pre-money valuation in their first round, $5MM at a $25MM pre-money valuation in the second round and $10MM at a $50MM pre-money valuation in the third round. In the second scenario, the entrepreneur will have sold a total of 54% of the company (13% less than in the first scenario).
  
  Staging works in favor of the entrepreneur because the blended average valuation of the two rounds may be higher than the valuation of the first round, and it forces the investor in the first round to absorb some of the dilution from the second round.

As a result, the entrepreneur has incentives to both maximize and minimize the investment size. In my post the, How Much Capital You Should Raise: VC’s Perspective, I describe how the VC also has conflicting incentives.

Good VCs deal with these challenges all of the time and ultimately want the entrepreneur to find the right balance so that they maintain an exciting stake in the company while minimizing time invested in the fundraising process. As a result, new entrepreneurs should look to VCs and other advisors that they are comfortable with for some guidance on fundraising targets.

Comments

[Entrepreneur]

Entrepreneur itself means who takes all the perspective to get growth in business capital as you have said in your blog.