How Much Money To Raise
Image via Wikipedia
I spent some time yesterday talking to an entrepreneur about this topic and I thought I'd share what I told him with everyone.
When your company is growing really fast, doubling employees year over year, adding users and customers at a very rapid rate, you don't want to raise too much money. If you raise three or four years of cash, there is a very good chance that by your second year, you will be sitting on cash that you raised when your company was worth considerably less. That's not a good thing. It's too dilutive to you and your co-founders and angels.
I've got two basic rules of thumb. First, try to dilute in the 10-20% band whenever you raise money. If you can keep it to 10%, that is great. You might have to do more, but try hard to keep your dilution below 20% each round. If you do two or three rounds at north of 20% each round, you'll end up with too little of the company.
Second, raise 12-18 months of cash each time you raise money. Less than a year is too little. You'll be raising money again before you know it. Longer than 18 months means you may well be sitting on cash that you raised when your company was worth a lot less.
These rules are most applicable in the early stages. When your company gets above 100 employees and valued at north of $50mm, things change. You may need to have more cash on your balance sheet for working capital reasons and you may not be increasing value at quite the same rate as you were when you were smaller. You might want to raise 24 months of cash or more at that stage.
But for the seed, Series A, and Series B rounds, I think 10-20% dilution and 12-18 months of cash are ideal. It's what I advise our portfolio companies to do and it is what I advise other entrepreneurs to do.
Good advice for successful startups. I hope ours will be in this position soon!
Excellent post! Thanks Fred!
Thanks for sharing Fred. It’s a topic we were talking about in our team. I follow the same strategy how to keep it below 20% if not even 10%. Wondering what’s the worst maximum share someone gave away you heard about?
i’ve seen financings that were 50% dilutivevery painful
Under which circumstances, typically?
recaps and such
Am I wrong in thinking that for most of the history of the venture business, the A round has been 40-50% dilutive with 2 firms each ending up with 20-25% of the company?
In Brazil, most startups start with a seed funding with 50% dilution. A lot of entrepreneurs realize their mistakes when they get to a series A or B investment. The funny thing is the entreprenuers still feel they are the owners even with less than half of the company.
Fred, in your experience, do businesses that go through that kind of dilution succeed less? Maybe you can write about success / failure factors after that kind of dilution?(edit: reason i ask is that it seems that there would be more than just owning too little of the company ..or not? )
I would think they would…lack of incentive for the entrepreneurs to put in the passion and hours required to make it.
In my experience, I’ve seen the opposite. A lot of entrepreneurs tend to work even harder when they become minority shareholder because of the sunk cost effect. The more you lose, the more you try to recoup what you lost.
In Brazil, it’s rather common for people to have to give away over 50% of their companies. In my case, I chose not to continue with the madness and I decided to give away the startup to the VC and start on my own 100% and take a backpacking trip to Europe next week 🙂 plus, DO YOU REALLY NEED A INVESTOR? I realize that most entrepreneurs want to have investors just for the sake of it. Also, it shows me they haven’t worked hard enough to find other ways to create their startup.
This approach makes a lot of sense. But re: “When your company gets above 100 employees and valued at north of $50mm…you may not be increasing value at quite the same rate”, what about the cases of meteoric growth like Foursquare where it appears their valuation went from $10m to ~50m-100m to 600m in about 18 months. Their value was increasing drastically when they crossed the $50m. It’s hard for me to see them as an exception for your portfolio, yet they don’t seem to fit the progression metrics you have outlined here, or do they?
we are not in a normal valuation environment
That’s what I thought. So, that’s the caveat emptor. The deltas between normal and not normal are mind-boggling. Let’s hope the crash has a softer landing than in 2001.
Reminds me I need to get money before this crash starts so my bank account is good to go … and then can maintain growth while most competition dies off — weeeeeee!
I believe a few of the top tier investors have begun to pass on deals that have jumped out of their comfort level. If you’re company hasn’t nailed significant traction you may find a dry market or have to pursue customer based financing.
I’m not too concerned about traction. My value proposition is pretty solid. For many investors to get a piece of similar companies who I will undercut and do a much better job than them (already am) would cost them a small fortune for a small percentage, as opposed to investing in me for some small change but good enough equity %.Worse case scenario after my latest I will ask happy/supportive users for donations to then implement the revenue-making features and go for customer-based financing.There’s always a way. 🙂
That’s the spirit. Glad things are going well. Funding can be a frustration point and fixation for some founders, but there’s more than one way to build a company.
I think it will – it will be all private moneys rather than public moneys (at least for now)
I believe companies are raising money now even if they don’t need it, just because of the environment. Maybe for a startup, it means raising more than you would have otherwise.
I think that’s bad if you don’t know what you can immediately do with that money though to benefit the company long-term. Why diminish your ownership/equity now when you could hold onto it longer and get more for it later?
In general I agree, but each situation is different. If a company knows that they will need more funding in the future, but doesn’t believe that the environment will be as favorable as it is today, then perhaps they would want the cash in the bank now.
True, though as an investor I would see that as a bad investment – or not as good of an investment with someone who’s confident enough they can gain traction and grow at a normal market valuation.
The correlary here is to keep early stage expenses under control. While it’s cheap to start a company these days, I am seeing more than a few early companies that are starting to get too into the “lifestyle” and spending like they’ve already done something more than raise money.
I would hope people who win funding are past excitement-driven decisions and are using analytics to guide and prioritize tasks – and be excited by that instead..
It’s mostly little stuff. But I’m seeing more and more start ups splash cash around in ways that are starting to remind me of 98-99.For instance (and not to pick on them) no pre-rev startup should be using ubercab for their employees (particularly in NYC). Yes it’s a little faster (although not in NYC), and yes, you feel cool being picked up by a black limo (I suspect the emotion of that is why they are doing well), but your ride cost 2X what it would otherwise cost.
Erik,That is like health insurers getting themselves naming rights to stadiums…they operate in a very protected market, competition is limited and everyone needs health insurance…but they still have a desire (CEO ego?) to have something named after them….Millions of dollars a year and not a dollar to the bottom line….that is a problem in lots of businesses…
Oh. LOL. I’d still bike or walk everywhere – or borrow my parents’ old rusting Sports-model van (or a friend’s car if needed).I’d want to invest in quality adjustable desks and chairs though.. Productivity can be heavily increased so it’s justifiable in my mind – over spending less for fixed-height cheapo tables for example..
+1, Erik. Every startup should keep in mind a recent company that made quite the “colorful” splash when they raised $41 million.Funding shouldn’t be the high point of your company and how you raise and spend money speaks volumes about what kind of startup you are.
Why are people not keeping expenses under control – don’t any of these people have a paranoid fear of what failure could make of them?
Because they believe their press clippings.If enough people blow smoke up your ass that tends to happen.
I’ve been through enough to know I’m normal underneath.
yep, and you end up with cancer … it doesn’t matter where the smoke enters, it will cause cancer!
Bingo. Funding is never a milestone, it’s above all an obligation to the poor schmucks who believed in you.
Not to pick on TechCrunch, but I think should be called the TechCrunch Effect or something like that.I’ve always said I could get a monkey to spend money.What’s hard is getting other people to give you money.I too have seen more and more companies trying to look the part much more than actually build something.
would you agree that one way to keep dilution down is to have more investors?, i.e., the demand works in the entrepreneurs’ favor.
more interested investors. if you try to put too many investors into your round, you’ll end up selling too much of the company
Fred, if an entrepreneur has to choose between one top tier VC for 20% and two top tier VCs for 10% apiece, which is the right choice?Will any top tier VC give top-level attention to a 10% investment?
Probably if they can get another 10% next round? That’s my thought anyway..
The challenge is downside risk. If the going gets rough, will you have twochampions in your corner or will you have two VCs who both have too small anownership to make you one of their top priorities for survival?I know it’s an odd thing to worry about right now but I’ve been through downcycles before and I want to be a top tier priority for an investor. To me,that’s one of the few great reasons to still go VC right now.
And in reverse, would you rather 2 VCs to spread out the risk in case one of them wants nothing more to do with your company (for whatever reason)? Then you’re fucked. If there are 2, perhaps the other is willing to buyout the other and invest. Who knows.. but 1 with more has risks too.
Exactly…hence my question.
Great advice … as long as there is money to be had >18 months.Wonder how many people are willing to bet that at this point?-XC
you can always rely on your insiders if they are reliable
I was in the middle of a raise during the Enron/NTL meltdown. My current business partner was starting a raise during 911.We are, perhaps, much more cautious than most people.-XC
In my short time on the investment side, I’ve settled into advising seed stage companies – as a *general* rule – to raise ~18 months of capital. The rationale is to raise enough capital to hit some meaningful value accretive milestones, plus provide some reasonable buffer for slippage (i.e. it almost always takes longer than originally planned) and then a few months on top for follow-on fundraising. Since most companies we see plan to hit value enhancing milestones within ~12 months, I encourage them to conservatively add 3 months for slippage and 3 months to fundraise (of course, the fundraise does not exactly start at 15 months nor necessarily take an *incremental* 3 months). While I don’t think this is particularly conservative, it does presuppose a bias towards some downside protection – intentionally so because crossing the chasm between raising the Seed and the Series A can be very very difficult for those 80% of companies that are neither killing it nor being killed. The challenge is that with raising 18 months of capital, most companies need between $1-2mm in capital and unless the company is super hot selling only 10-20% of the company can be difficult. If we take the midpoint of the $1-2mm range, say $1.5mm capital raise, selling 10-20% would imply a pre-money range of $6-13.5mm. In some sectors and geographies this range might be market, but in our area of focus these #s are reserved for only the hottest of hot deals. The range of dilution I’ve seen more common in our Seed deals is 20-30%.Of course, the devil is always in the detail of the specific company and I defer to your vastly superior expertise, but anecdotally, this is what I have seen at IA.
my advice, if you are at the low end of the range, $6mm, would be to raise only $1.2mm and figure out how to operate at less than $80k/month burn
Fred, bsiscovick,Need some advice…Re: “crossing the chasm between raising the Seed and the Series A can be very very difficult for those 80% of companies that are neither killing it nor being killed.”In the current valuation context of the market how should an early stage company in this “chasm”, that has a product and is just starting to sell it for revenue to business subscribers, come up with a valuation that makes sense so I we know what amount to raise?Thanks,Roger
I do think there is something here which you do not mention, but I am quite sure you believe in heavily – which is to make sure that you have the right partners coming along for the ride with you.Keep it to 10%-20% – but if you reach the upper boundary with the right investors – that might be better than getting the higher valuation from investors who are not as value added.For the founders the real key is how much they own on the day when they go to sell – either through a strategic M&A deal or an IPO. It’s hard to think about that at a seed stage financing – but entrepreneurs should keep this firmly in mind.
yes, absolutely. but i didn’t want the post to come across as self serving
On the money Harry. I may be keeping it too simple, but if you dilute yourself with a big stash of cash from those without any talent applicable for that time period, you’re going to run into trouble.Somewhere, money from a source with skills pointed in the marketing end is going to be a must. Just doubling your money based on doubling your employees doesn’t make sense unless the higher number of employees beefs up other departments.
I never met an entrepreneur who was upset they raised too much money. A quote from one of my favorite vc’s when I was worried about being over subscribed to a round I was raising.
But…remember that was a VC saying that to you. Fred is a VC but he was being an advocate for the entrepreneur in his advice in this particular column.
Roger, I think the distinction my be having an oversubscribed round (maybe 20% more money than your “ideal” vs taking 2x or 3x what you think you need.Also, I agree on the timeframe idea (looking out 12-18 months); however, I would also consider when the next major milestone/valuation change is likely to happen. For example if you are in seed stage, maybe much of the perceived risk is just in building out your product at which point risk drops off. If that is 4-6 months away, then I might aim to raise money to get me just past that milestone….Tim
Tim,Excellent point and the reality is that is where I am at right now. We have initial sales to a handful of business subscribers in a specific geographic market. The next milestone is 4 to 6 months off to take that to 50-100 paying business subscribers and at that point we will have a valuation inflection. So raising now for even 12 months may be too dilutive. Where we are now is a really painful, purgatory-like place where the standard guidelines don’t fit as well. Thanks for your comments.Roger
Three things: a) things often take longer than we think (so your 4-6 might end up being 8-10); b) it takes time to raise money, so you have to have enough to float you through that time alsoc) If you run out of money your company dies.
I should hope every Angel reading your reply is impressed with your strategy. It is better to pivot due to understood “taking a little more time” vs. too much in without customers/rev to show for it.To be beyond this “bubble” issue, if you are putting on paper actual figures, then you are able to deal from a more straight up.Good job.
Thanks Dave. As you know it’s great to get the occasional “good job”, especially from someone who I know has felt the pain. 🙂 The difficult place we are still in on funding is I’m finding that a lot of investors (Angel and VC) don’t seem to get it at an intuitive level if you are building a SaaS service that actually solves a business problem for business subscribers as a first priority; before shooting for massive consumer adoption.With our approach we have to bootstrap pretty much one business customer at a time during our ramp to 50 businesses.But after that the momentum will build rapidly due to word of mouth from our happy, reference business customers.This is very different though than creating a Twitter-style or Foursquare-style set of adoption metrics from free subscribers and then trying to pivot and ramp up paying business subscribers after the consumer adoption ramp.I think the “bubble of hype” from rapid free subscriber adoption actually makes it very hard for the Twitter’s and Foursquare’s to pivot to monetization. Their brand and the user expectations from millions of users are all focused around the free service features for consumers; “microblogging” with Twitter and “Social Checkins” with Foursquare.That’s all cool but, when Twitter or Foursquare then have to approach small businesses to pay for business services the problem is those businesses already have an expectation of the service being free.Also the reality is Twitter and Foursquare spent most of their time making the free user experience polished versus thinking from the start about a service that is easy to use for small business owners; and therefore something they are willing to pay for.We are taking an opposite approach. We are focusing first on business value and business features from the start and we make our businesses pay something, even in beta, for the service. This properly sets an expectation and willingness to pay from those businesses from the very start. Then when we rollout our cool and compelling free services for the consumers, with consumers our businesses have recruited for us from their existing customer set, we already have a business model built in at the DNA level of our solution.This is a tougher road to success upfront but easier in the long run.Many VC’s seem not to be used to seeing entrepreneurs take this “road less traveled” of “solve a business problem first then through in the cool factor.”Cheers,Roger
@rtoennis:disqus Find some time to think of the bigger where you can expand sources of revenue doing the ‘free’. If nothing else, it is good therapy against the pressures faced 24/7.My uncle is not in good shape at the hospital, so my time is limited, but I did a quickie on the Google+ post that moves to changing the biological machine over the the mechanical biological aka setting things that are fluid/flexible/adjusting (more autonomous the better) to keep up with the random needs of the animal.No matter what the big money guy says, if you can produce the truly valuable without a bunch of money left over (waste) will win in the end… aka determine valuation from revenue matched with ultra conservative assumption vs. a bunch of hype.Grab a cold one today ;D
That means the VC has never seen a disappointing exit by an overdiluted entrepreneur. They certainly happen.Taking less money means you have more options if your valuation doesn’t end up where you think it should. Taking more money means you have more options if things take longer than you thought.Choose wisely. 🙂
Solid advice on the dilution front. Seems like more can be said on the 12 – 18 months operating budget though. I have already seen a few startups that planned for that, yet burned through the cash way faster than anticipated. Budgeting and spending discipline are key.
Good insight. My company has self-funded for the past 18 months but now we’re at the limits of how much we can grow without funding. People have been saying my first round of funding would be more like 30-40%. I guess it’s all about how much money we need and what valuation we can get.
Love the picture, Fred. I assume you’re suggesting raise each round in wads of $100 bills, right? This is a great guide. The market and your needs typically dictate the structure of the round. If you need money and there aren’t many investors (i.e. non competive process), you’ll be giving away 30%+ of the company. If you have a ton of investors banging down your door, you give away 10% or less. (This is all before talking option plans, etc.) If you are one of the select few Baby Jesus companies (FBOOK, Twitter, etc.) you can raise money and take less than 5% dilution. Now back to my grill …
Fred – as an entrepreneur, I love the numbers you suggest. However, I’d like to ask how to reconcile those numbers with:1) Many (most?) VCs still shoot for owning 20% of a company2) it is considered good practice to do two-handed deals with multiple VCs participatingIs this advice mainly for the outliers like Zynga and 4Sq? How does a startup that is doing really well but not crushing it make all these ideas work in unison?
In many cases, the 2 goals are incompatible: a) don’t dilute more than 10-20%, b)raise enough money for 18 months. You may not be able to find the money that will go along with those 2 items.
Finally! I am beginning to understand the world of financing start ups, Venture Capital, and Angel Investors! It truly is a totally different world….I was asked once if I was looking for “seed, Series A or Series B” and I said, “….hmmm, whatever….” That’s what happens when you build airports in Kentucky and let hillbillies fly to NYC or Boston….Basically, “seed, Series A and Series B” are all levels that are built to limit risk. You finance a seed, then it develops or dies in 12 to 18 months….if it has developed sufficiently then it can go back to the market with higher valuations for more funding.
If a company self-funds for the first 18 months, then looks for funding, is that funding still considered “seed?”
Fred WilsonWould you please do a post on 83b filings and the tax benefits.Thanks
I am all ears. 😉
taking notes…thank you!
Good post. 18 months goes by in a flash. Better to have too much money on hand than risk being in a situation where you are desperate to raise money. As for dilution guideline range of 10-20%, that’s great, but sometimes the entrepreneur is going to be diluted more than that. Better for them to take the money and the dilution, than join the millions of carcassas along the roadside who held out for too high a value. Thanks!
Hi Fred,This is right what we were looking for… up to 20% and ±16 months seems a magic number…Thank you so much for sharing.. this is really good & important post.Thanks,Sharel
“How much money to raise? for the seed, Series A, and Series B rounds, I think 10-20% dilution and 12-18 months of cash are ideal”Great, twitter length, advice ;)Although I’d say shoot for nearer to 18 months than 12 because raising money is so time consuming and you really don’t want to be thinking about laying off staff just because it’s taking longer than you thought to raise the next round.
It ‘hard to believe that the seed-stage financing – but the entrepreneurs should keep in mind this.a deal a day
Thanks for the informative post. Being a founder of a tech startup called tingbasoft.com I am now ready to beta test the cloud based SaaS IT Service Desk tool.When I started this company, I did consulting on the side to bootstrap this project. Now that it is ready for beta and launch in months i am considering raising capital. I was always thinking that raising capital for 2 – 3 years is a good safety net. Your post has definately made me think of the other aspect as well. – Thanks
I believe companies are raising money now even if they don’t need it, just because of the environment. Maybe for a startup, it means raising more than you would have any other source
Fred, thanks for taking the time to make things simple. “for the seed, Series A, and Series B rounds… 10-20% dilution and 12 – 18 months of cash are ideal.”
I completely agree… people get to greedy to fast and the lose out big time
another factor to consider is the likelihood that you may need to toss your business plan and start over … “pivot” is the trendy word. if there is a reasonable risk of needing to reboot the company, it may be worth raising more than is typical in order to give yourself more runway. it may be harder to change direction when low on cash than when sitting on a pile of money. seems unlikely that investors will be sympathetic to the hey-we’ve-really-got-it-figured-out-this-time story. but you don’t see too many investors liquidating companies and demanding their money back when an initial business model doesn’t pan out, so that’s the time to change course. I did a study of the speech recognition industry from 1952-2006 (http://papers.ssrn.com/sol3…. what I found is that when companies had their financing “chopped up” into more rounds via staged investments, they were considerably less likely to pivot. those who raised their money all in one shot were much more likely to try different business models over time. it’s just one industry, but it’s an industry where a single technology has been commercialized in myriad ways and may be instructive for entrepreneurs who aren’t 100% sure what their final business model will be.just two illustrations from my own experience in that industry: both Speechworks and Tellme networks changed their business models about 18 months in, when they still had plenty of money in the bank. Tellme’s pivot was particular severe. some years later I asked one of our then-investors whether he would have reinvested to support the new business model if we had been low on cash. “Absolutely not!” he practically yelled at me. so, if you think you might need to change directions, you might want to raise more money than investors’ rules of thumb might suggest. of course there are tradeoffs in terms of valuation and % ownership, and it’s nontrivial to predict whether you think you’ll need to change direction. but something to think about…
Great advice, but most VCs I know won’t settle for a 10% share unless you’re an extremely hot startup. My experience is that they push for 50% and you need to have something very hot to down even close to 20%. So, in effect, it means turning the money down or giving away too large of a stack. That’s why I’m bootstrapping my current venture instead.
Good advice I should’ve learned before closing the round, although I’ve started to learn that at the seed stage you should be using your money faster so you can move quicker … hard to balance that with keeping a 12-18 month runway I guess.
Thanks for sharing these thoughts on start-up fund raising @ stage 1.
Fred, I would layer on that at the later stages (expansion through growth), raising enough cash that would allow the company to be break-even (with a high confidence level) is best. This point excludes some “fat” start-up approaches or strategies that avoid creating a meaningful economic model, but works for the vast majority of businesses. The key is that the company does not need to worry about the shifting capital markets if they approach funding this way and they still have the option of taking more growth capital at any point. Low financing risk with a free option is a great financing strategy for expansion stage companies.Scott Maxwell OpenView Venture Partners
the market will determine the valuation. the more competition you can create, the better off you will be
Fred,What’s the right approach for an entrepreneur to start doing this “competition creation” on the raise? I’ve been bootstrapping now about 18 months on seed money and I have a product(service) and initial sales and even a smidge of anecdotal revenue.Does all the fundraising attempts I do now with early stage firms have to happen via an introduction from someone both I know and the firm knows or is submitting cold though firm websites worth doing?Thanks,Roger
is it better to be more dilutive or to raise money for more/less time knowing that you would need to change your plans?