When I was raising money for LaunchBit, sometimes my conversations with investors would go something like this:
Investor: So how much are you raising?
me: We’re raising $750k.
Investor: Really? Why so little? You should be raising $2M+ or even a series A.
Of course, the first thought in my head was, “Wtf? I’m struggling here to just raise anything!” But, of course, I couldn’t say that out loud, because then the investor might not want to back me.
This kind of conversation happens a lot, though. So what do you do? You need to prepare four fundraising plans. What would you do if you raise:
- $0?
- Below your target raise?
- Your target raise?
- Above your target raise?
What happens if you can’t raise at all?
First, let’s address the easiest scenario – what if you raise $0? Do you bootstrap and attempt to raise again when you have made more progress? Do you have family and friends who can help float you?
This is a situation you should always be prepared for whether you are actively fundraising or not. Investors will likely even ask you this question as a hypothetical scenario to understand how you think about your business.
Investors want to invest in growth
The trickier situation is to prepare for the remaining three fundraising plans.
Taking a step back, it’s worthwhile to know that regardless of your stage, investors want to invest in growth. To be clear, growth means increased revenue or increased number of users or customers (or both!). It does NOT mean growth of your employee base!
With that in mind, you should understand clearly what lower and upper bound raises you’d be wiling to chase. In other words, your lower and upper bound numbers should ALWAYS be raises where you could put the money to good use to grow the company. Here’s a quick thought experiment:
For your upper bound number, if someone offered to invest $50M into your company, would you know how to deploy that money efficiently to increase your growth tremendously?
For nearly all seed stage companies, the answer is no. You could certainly hire more people with $50M, but again, growth is not measured in terms of employees. It’s measured in revenue results. Could you turn $50M into $1B in revenue in the next 2 years? At the seed stage, you don’t have enough information about the levers of your business to know how to do this.
At the seed stage, you might have some sense of 1 or maybe 2 customer acquisition channels that are working (at least for the time being). You should use your data from these experiments to figure out the maximum amount of money that you’d feel confident throwing into these channels to yield great growth. Great growth in venture investors’ eyes is often 30% MoM growth or higher depending on your baseline revenue and the space or business you’re in.
Similarly, you’ll want to repeat the same exercise for your lower bound number. If you were to spend 2 months dedicated to fundraising, what is the smallest investment number that would be worthwhile raising such that you could immediately pour that money into growth for your business?
Consider growth, 18 months of runway, buffer, and milestones
Ok, so now you have a lower bound and an upper bound number for your raise.
Now, to pick your target raise (which is in between the lower and upper bounds), you should figure out the number in this range that will:
- Give you 18 months of runway
- Multiply that number by 2 for buffer, because things always take twice as long to achieve
- And also gets you to the next milestone in that timeframe
If your next milestone is a series A round, you should remember that series A milestones tend to be in the $2M-$3M net revenue runrate range these days. This is a step up from the $1M runrate milestone that people touted a few years back.
If your next milestone is a seed-plus round, you should know that a lot of startups chasing after seed-plus rounds (i.e. what the old series A rounds used to be) tend to be doing $500k – $1M net revenue runrate range today.
Note: Marketplace and ecommerce companies, GMV is NOT REVENUE.
I’m sure the milestone targets will only rise as more people become entrepreneurs and competition for limited investor dollars increases. So, aim to err on the side of being more conservative around what milestones you need to hit. Also, if you are in a crowded space (e.g. on-demand food), you will need to go above-and-beyond and surpass these rough milestone guidelines to demonstrate you can rise above the noise.
More on milestones in a subsequent post, but the bottom line is that you should make sure to pick a target raise number that hits these criteria. You do not want to fall short and be dismissed at the next round for not having accomplished enough in a timely manner because you raised too little money.
Form a concrete plan
So, now you need to prepare a concrete plan for all three raise numbers. You should figure out:
- Who you would hire? (if you have specific names of people in mind who want to join you, this is even better)
- How you would deploy the money for growth? (the more specifics, the better)
- What milestones would you hit? And on what timeframe?
- What would the payback period of your customer acquisition be? (if you know)
Four plans give you optionality
Now that you know what you’ll do in each of these four scenarios, you have a lot more optionality. Although you will still go out and discuss your target raise, if an investor asks you why you aren’t raising more, you can always say, “Well, actually, I’ve prepared a plan around X, and if we have the interest, we’ll certainly opt to do more with a larger raise.” By preparing details around how you’d use the larger raise, an investor may actually offer to invest at that larger amount.
Alternatively, let’s say an investor says, “I really don’t see how you’ll hit your target raise, and if you’ll fall short of your raise, I’ll lose my money. I’m out.” You’ll have a good response to this as well – you can describe what happens if you raise near $0 and also what you can achieve with your lower bound raise.
Alright, go get ‘em!
good strategy – good advice
thanks Steve!