How Much to Raise

What the greatest technology investors say about How Much to Raise

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

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/

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

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/