How much do you need to raise?
Enough to survive until the next round! In this post we'll dive into how to estimate that number.
This is one of the very frequently asked questions I get through Fundraising Radio and deciding how much do you want to raise is crucial indeed. If you raise too much early on, it means giving away too much equity and, consequently, 10 years later you might get a great acquisition offer but by that time you will own only a tiny portion of your company and won't become a billionaire as you plan. This is sad but not critical.
On the other hand, if you are conservative and therefore raise less capital in order to preserve equity, you might not be able to reach your key milestones necessary for the next round. This is sad and can kill your company.
As you understood, this step of fundraising is extremely important. So instead of trying to make up random numbers to estimate how much your company is worth today, take a seat and prepare to do some math to calculate how much money you need to raise today to make sure your company will be worth 20 times more tomorrow.
Before we move on in this chapter, please note that it is highly recommended to raise your first rounds UNPRICED - meaning that you will be raising through SAFEs or similar instruments. I will not go into the details of unpriced rounds, to sum it up - they are much cheaper to create and they don't require precise valuations, but they come with something called "valuation cap" and this is exactly what I help you prepare in this chapter. If you want to read more about priced VS unpriced rounds, here is a good article: https://capbase.com/priced-and-unpriced-financing-rounds-what-are-the-differences/
Now, let's dive in and evaluate your company!
The average timeline between two rounds of funding is anywhere between 11 to 18 months so you will have to raise enough to last at least a year. And here is what you need to calculate to approximate the amount of money needed:
1. Payroll expenses: new hires, paying for HR services (if you have never done recruitment before, it is highly recommended to leave it to professionals), hiring contractors for some small jobs, bringing in consultants and advisors etc.
2. Team maintenance: if you are building a fully remote team you will need far less to support them but be sure to spend some money (or shares) - include someone from Upstock, carta, clara or similar resource for cap table management and issuing shares to your early employees.
3. Tech maintenance: Even if you are not in hard-tech, you will have to bear these expenses, they are inevitable like death itself. This includes paying for your website hosting service, renewing your domain name, keeping your custom emails live, using automation tools to speed up your work etc. There are dozens of tools that a startup needs in order to sustain itself and this aspect can be calculated quite accurately so try to spend more time on thinking of the tools you will need and estimating their costs.
4. Marketing budget: Depending on your business model this might equate to $0 or 50% of the funds you need to raise. If you need to acquire sizeable amount of customers, think how much you want to spend on paid advertisement and how much you want to put in organic growth (sponsoring blogs of others, putting your company's name on trusted websites, etc., although some people think organic growth means free growth - well, it is not).
5. Individual expenses: Each startup has its own unique needs and I can not list all of the potential expenses you might have but the 4 points above are the inevitable ones. Now that you have calculated the expected expenses for points above, sit down with a pen and piece of blank paper, make a list of everything else that you might have to pay for - ideally talk to your team members about the tools that they need for their work, sum everything up and that will be your number for point #5.
6. Miscellaneous expenses: Shit happens. Especially in the startup world and even though you can not predict how much of it will happen in-between your current and future round of funding, you need to prepare for some reasonably expected amount of it. After summing all the 5 points above, take this number and multiply it by 1.2 - this is the quotient I personally recommend using which seemed to be working fairly well across multiple startups I have encountered.
However, it is most certainly not a silver bullet.
This point is very tricky because if you raise too much in reserves you might end up with cash just sitting in your bank account unused while shares of your company will be gone forever. I recommend discussing it with your co-founders and deciding how much "shit happens" you expect to encounter. But if after you crunch the numbers you are still unsure of how much to raise, I recommend aiming for the bigger number just to make sure your company survives until the next round.
Hope you have found something useful for yourself in this post and if so - share it with fellow founders below.
And of course, check out our full course here: https://fundraising-courses.com/ and if you want to ask about advice on a specific subject, ask us a question in this typeform or respond directly to this post!