How Much to Raise

What the greatest technology investors say about How Much to Raise

HOW MUCH TO RAISE POSTS (10 posts)

The following is a list of the post titles by author under this topic.  Scroll further down this page to find the actual blog post by your selected author.   Author’s posts appear in reverse alphabetical order.  For example, following this list, Fred Wilson’s posts appear towards the beginning of the blog page, and Chris Dixon’s posts appear towards the end of the blog page.  

CHRIS DIXON (3 posts)

Chris Dixon:  How Much Seed Money to Raise

Chris Dixon:  Think of Dilution over the Company’s Life & How Much to Raise

Chris Dixon:  Tranching Can Create Misalignment of Interests  

JOSH KOPELMAN  (1 post)

Josh Kopelman:  High Valuations Can Limit Exit Opportunities

HOWARD MORGAN  (1 post)

Howard Morgan:  Fail Quick & Cheap

BABAK NIVI   (1 post)

Babak Nivi:  Tips When Raising a Seed Round

MARK SUSTER  (2 posts)

Mark Suster: Be Leary of Too High a Price

Mark Suster:  Shoot for 18-24 Months of Runway When Fundraising

FRED WILSON (2 posts)

Fred Wilson:  Two Rules of Thumb for Early Stage Fundraising

Fred Wilson:  Fred Wilson's Comfort Zones on Fundraising & Valuation

 

Fred Wilson's Comfort Zones on Fundraising & Valuation

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“I'm all about “back of the envelope”.  I am old school but these are my comfort zones:

Build product - raise [$] 600k at 3mm post [post-money valuation] 
Build usage - raise [$]1.8mm at 9mm post 
Build company - raise [$] 4mm at 20mm post

I am not in my comfort zone these days.” [Wilson was referring to valuation-wise late 2011 and presumably early 2012 as well.] Fred Wilson Burn rates: How Much?  Comments, Dec. 12,  2011; http://www.avc.com/a_vc/2011/12/burn-rates-how-much.html

Two Rules of Thumb for Early Stage Fundraising

Fred Wilson venture capitalist and Co-Founder Union Square Ventures

“[With a fast growing company], doubling employees year over year, adding users and customers [] very rapid[ly] [], [] don’t [] raise too much money.  [] [Otherwise] [the company] will be sitting on cash [] raised [at a lower valuation] [] [which is] too dilutive to [founders] and angels.

[Wilson has] two basic rules of thumb [for the amount to raise in early stages, i.e., seed, Series A and B rounds]. First try to dilute in the 10-20% band whenever you raise money.” 10% is preferable.  More may be necessary, “[] but try [] to keep [] dilution below 20% each round.  If you do two or three rounds [exceeding] 20% each round, you’ll end up with too little [equity].

Second, raise 12-18 months of cash each time you raise money.  Less than a year is too little. [] Longer than 18 months means you may [have cash when the company had at a lower valuation].

[] When [a] company gets above 100 employees and valued at north of $50mm, things change. You may need [] more cash [] for working capital [] and [the company] may not be increasing value [as rapidly as] when [it was] smaller.”  A raise of 24+ months cash may then be appropriate.  Fred Wilson, How Much Money To Raise, Jul 3 2011;  http://www.avc.com/a_vc/2011/07/how-much-money-to-raise.html

 

Be Leary of Too High a Price

Mark Suster Partner Upfront Ventures and former entrepreneur

 “[] [Suster has] seen a destructive cycle where otherwise interesting companies have been screwed by raising too much money at too high of prices and gotten [] [trapped] when [] markets correct and they got ahead of themselves [on inherent market valuation]. []

[It’s] OK to [] shoot for the “top end of normal” for the market conditions. [] [He] caution[s] entrepreneurs from [] raising money at significantly ABOVE market valuations. []

If [entrepreneurs] haven’t figured out product / market fit and therefore still have a highly risky business [they] run great risks for getting too far ahead [] on valuation. [] [Most] investors won’t want to [][do] a “down round,” which creates tension between them and early investors.

[] [Sophisticated] investors know [a major down round] is fool’s gold.  They get a cheaper price, [] wipe out much founder stock value and [] reissue [founders] new options. [Founders] take the money []” except their incentives get eliminated.

[] He advises “[] us[ing] competition to [][ensure] a fair price [and] rais[ing] a slightly higher round than [] [otherwise for some strategic reserve]. [] [One wants] to show an uptick in valuation [] for new investor confidence and to maintain [early investor relations].”  Mark Suster  Why Startups Should Raise Money at the Top End of Normal,  June 5, 2011;  http://www.bothsidesofthetable.com/2011/06/05/why-startups-should-raise-money-at-the-top-end-of-normal/

Tips When Raising a Seed Round

Babak Nivi Co-Founder AngelList and Venture Hacks and angel investor

When raising money in a seed round: “[] Take as much money as you can while keeping dilution between 15-30% (10%-20% of the dilution goes to investors and 5%-10% goes to the option pool).

Compare this to a Series A which might have 30%-55% dilution. (20%-40% of the dilution goes to investors and 10%-15% goes to the option pool.)

A seed round can pay for itself  if the quality of your investors and progress brings your eventual Series A dilution down from 55% to 30% (for the same amount of Series A cash).

Don’t over-optimize your dilution.  Raising money is often harder than you expect, especially for first-time entrepreneurs.”  Babak Nivi, Venture Hacks  How do we set the valuation for a seed round?  April 17, 2008;  http://venturehacks.com/topics/dilution

Fail Quick & Cheap

Howard Morgan Partner First Round Capital

Morgan explained  his firm’s investing strategy. “We were the first ones to do seed-stage investing professionally. [] We also knew [] how the venture model worked, where you couldn’t afford to fail.  The key to our strategy is failing cheap.  The one lesson [] for all entrepreneurs is, ‘If you’re going to fail, fail quick and cheap.’  There’s no stigma in failing that way.  But if you blow a hundred million bucks, big stigma.”  Howard Morgan, from the book, Mastering The VC Game by Jeffrey Bussgang,  copyright 2010, pg 65-66

High Valuations Can Limit Exit Opportunities

Josh Kopelman Partner First Round Capital and former entrepreneur

Kopelman advises that entrepreneurs who “[] try to maximize valuation [] in many cases [] might be shortsighted” because high valuations can limit exit opportunities.  “[] too many founders are not aware that they are shutting off the majority of exits -- and therefore increasing risks -- when they accept a high valuation.”  “[] the “unwritten term in the term sheet” [means] few VC’s will willingly part with a “winning company” (i.e., a company that is executing/performing well) for less than a 10x return.”  Thus, a VC could block an exit that could have been a fabulous payout for entrepreneurs and angels.  Josh Kopelman The Unintentional Moonshot, July 10, 2007, http://redeye.firstround.com/2007/07/the-unintention.html;  When the music stops... March 10, 2006;  http://redeye.firstround.com/2006/03/as_a_little_kid.html

Tranching Can Create Misalignment of Interests

Chris Dixon General Partner Andreessen Horowitz, angel investor and former entrepreneur

 Dixon says that tranching can create a misalignment of investors’ and entrepreneurs’ interests.  “[] tranching  refers to investments where portions of the money are released over time when certain pre-negotiated milestones are hit. [] In theory, tranching gives the VCs a way to mitigate risk and the entrepreneur the comfort of not having to do a roadshow for the next round of financing.  In practice, [Dixon has] found tranching to be a really bad idea.

[][Tranching] encourages the entrepreneur to “manage” the investors [hurting VC-entrepreneur relations, among other things].  One of the great things about properly financed early stage startups is that everyone involved has the same incentives – to help the company succeed. [] When the deal is tranched, the entrepreneurs ha[ve] a strong incentive to control the information that goes to the investors and make things appear rosy.  The VC in turn usually recognizes this and feels manipulated. [] There are better ways for investors to mitigate risk – e.g. lower the valuation, smaller round size.  But don’t tranche.”  Chris Dixon, The problem with tranched VC investments, August 15, 2009; http://cdixon.org/2009/08/15/the-problem-with-tranched-vc-investments

Think of Dilution over the Company’s Life & How Much to Raise

Chris Dixon General Partner Andreessen Horowitz, angel investor and former entrepreneur

“I prefer to think of dilution over the life of the company. Sometimes you give up more now to give up less later. []    I gave up 50%+ of SiteAdvisor to investors in the first round but in the long run was happy for it.”  That said, Dixon recommends raising “as much as possible while keeping [] dilution under 20%, preferably under 15%, and even better, under 10% [especially] for founders who aren’t experienced “developing and executing operating plans”.” 

“[] I know it sounds self serving as a seed investor but the path to least dilution is investors aligned with you on seed round where you don't raise too much money, and then raise the bulk of your money later.” Chris Dixon, What’s the right amount of seed money to raise?  Comments, December 28, 2009;  http://cdixon.org/2009/12/28/whats-the-right-amount-of-seed-money-to-raise/

How Much Seed Money to Raise

Chris Dixon General Partner Andreessen Horowitz, angel investor and former entrepreneur

The short answer for how much seed money to raise is “[] enough to get [a] startup to an accretive milestone plus some fudge factor” of say, a 50% round size increase.

““Accretive milestone” [means] getting [a] company [where it] can raise money at a higher valuation” and is a function of market conditions and the startup’s nature.  “As a rule of thumb, [] a successful Series A is one where good VCs invest at a pre-money [valuation] that is at least twice the post-money of the seed round.  So if [a] seed round [] raised $1M at $2M pre ($3M post-money valuation), [] the Series A [] should be [] a minimum of $6M pre (but hopefully [] significantly higher).

The worst thing a seed-stage company can do is raise too little money and only reach part way to a milestone.  Pitching new investors in that case is very hard; often the only way to keep the company alive is to get the existing investors to reinvest at the last round valuation (“reopen the last round”).  The second worst thing [] is rais[ing] too much money in the seed round [], hence taking too much dilution too soon.”

A startup should determine its expected biggest risk and how to eliminate that risk.  “For consumer internet companies [and SMBs (small/medium businesses)], eliminating the biggest risk almost always means getting “traction” – user growth, engagement, etc.[] For online advertising companies you probably want revenues.  If [] selling to enterprises you probably want [] credible beta customers.  

The biggest mistake founders make is thinking that building a product by itself will be perceived as an accretive milestone.  Building a product is only accretive [] where there is significant technical risk []”.  Chris Dixon What’s the right amount of seed money to raise?  Dec. 28, 2009; http://cdixon.org/2009/12/28/whats-the-right-amount-of-seed-money-to-raise/