If setting a valuation is an art, then the amount of money to be raised is a science. One of our mentored startups TWICE made the mistake of under-raising, against my personal advice. Today they are shutting down.
Why did they under-raise?
They founder wanted to save equity for their Series A round, but when they went to market to raise their Series A, they were early and out of cash. So, the Series A oasis turned out to be a mirage. Now the founders own almost 80% of the company but the company is valued at zero therefore confirming the oft used axiom:
100% of ZERO is ZERO
Then there are founders who start raising money as soon as the current round is over. I believe that such founders have fooled their current investors and are fooling the incoming investors. I have walked out of a startup where I realised such funny business was going on. A perpetually raising founder does not build anything of value except the value his investors have pumped into this bank account. These guys are found at every industry event running the same reel (albeit with different numbers) instead of working in their office.
What is the amount of money that founder should raise?
I prefer to sit with the founder and understand when the venture will reach an inflection point in their growth that will make them require the next round of financing to achieve higher growth levels. At that point, they should have adequately answered assumptions about their business model with validated learning.
Make a detailed budget for the time it will take them to get ready for the new round. Extend the budget forward for another 6 months and add a 20% contingency to each month’s budget. The total amount that comes at the end of that excel chart is the amount the startup should be raising.
The 20% contingency gives the founder some breathing space; in case he/she miscalculated the budgetary assumptions and/or the danger of falling short of raising the amount they required. The 6-month budget extension allows for; delays in getting the validated learning as well as the adding the time required for raising the next round.
The valuation and the terms of investment can be set after the startup provides clarity on the fundraise amount, not the other way around.
