One of the first steps in your pre-fundraising process, is to decide how much venture capital to raise. This decision is an important one. In your first meeting with VCs, it will undoubtedly come up and for VCs there can be a right and a wrong answer. Getting to the right answer is different for every company and depends heavily on your market, your product and your growth plans. We’ve rounded up what you need to know to decide how much venture capital to raise.
Your Burn Rate
When raising money, more is not always best. Raising more money than you actually need, even if you can, is typically a red flag for investors. They want to feel like what you’re asking for is reasonable given the size of your team, your traction to-date, and your operational needs for the next 18 to 24 months.
To get to this number think about what you need to get to your next funding milestone. If you don’t have a financial model or a pro forma, now is a great time to start one. Key components of this model should include: expenses, anticipated income, and expected growth. Depending on your stage, 18-24 months of financial projections may be more of an art than a science. That’s okay. The goal is to get to an estimate.
Y-combinator gives this simple equation:
“A rule of thumb is that an engineer (the most common early employee for Silicon Valley startups) costs all-in about $15k per month. So, if you would like to be funded for 18 months of operations with an average of five engineers, then you will need about 15k x 5 x 18 = $1.35mm.”y -combinator
If you’re looking for something more robust, here’s a financial model template.
When a VC asks you how much you are planning on raising, they’re really doing a calculation in their head on how much your company is worth, or your valuation. VCs have their own methods of determining your valuation, but generally speaking they’re focused on ownership dynamics, market terms, and competitive deal dynamics.
If you say that you want to raise $2m - the VC will generally assume 20-25% ownership. That means your valuation will be $8m post-money $6m pre-money on the lower bound and $10m post-money $8m pre-money on the upper bound. Does this sound reasonable based on your history, your product, and the market size? Great. It’s a wonderful place to start valuing your company.
Running a parallel process and setting up a fundraising process that sets up a competitive deal dynamic can stretch the upper bounds of your valuation and get to more favorable terms when you’re nearing the end of your fundraising journey.
Don’t get caught on your heels when a VC asks you how much you want to raise. Decide if the investment will reasonably get you to your next fundraising milestone and think of what you’re asking for from the point of view of the VC. Be prepped with your answer and good luck in your next meeting.
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At Fundboard, we’re on a mission to make every founder an insider. We match founders with the right investors at the right funds to invest in your idea. We add crucial hours back into your day and change the probability that your fundraise gets done.