How Much Should You Raise from Investors?

Today we’re going to talk about your ask.

How much you ask for is incredibly important.

That money will power your growth…

…or you’ll run out of $ and be up the creek without a paddle (and investors will be pissed off).

And yet, most founders are just guessing at how much they need.

Ask for too much and they won’t invest. Ask for too little and you’ll run out of money.

I ask pretty much every founder who wants to work with me:

How did you come to the number you’re raising?

The top-3 most common reaction faces I get:

1. ?? ??
2. ??
3. ??

Don’t worry - most founders don’t actually know how to get to the actual number.

But you will. Here’s how:

Step 1: Focus on what matters

When you’re growing an early-stage business, you’re continually answering a few main questions:

1. Is this something people want?
2. How hard is this going to be to sell (or get traction)?
3. Can this team do it?

Making meaningful progress on answering these questions means reducing uncertainty (and risk) and building value.

Major milestones on that path = value inflection points.

Money is just your bridge to them.

Step 2: Define your value inflection points

Value inflection points are the big step-changes & derisks that make your business worth more for investors.

Define yours by answering these questions:

What 2-4 milestones satisfy the following criteria?

1. Once achieved, they will represent the most meaningful derisks to the business
2. Must be 100% achievable within 12 months

Examples could be things like:

• Finalizing a large customer / distribution partnership
• Signing up your first few dozen customers
• Hiring a superstar that helps shrink time-to-market by 6 months
• Critical-mass revenue milestone reached (e.g. going from $300K to $1M ARR)

These are your critical-path milestones.

You only need 2-4 of them.

Step 3: Figure out what it costs to get there

When an investor asks you…

Are you sure you can hit that goal within 12 months?…

…Your answer needs to be: One hundred percent.

And you need to raise enough to manifest that certainty.

A couple rules of thumb (general):

• You don’t want to over-raise. Raising too much dilutes you & the other investors, too early on.
• You don’t want to run out of cash either. More below
• You gotta know how long it’ll last. Sweet spot: Typically, 15-24 months of runway.

Sense-check this amount with:

1. Would we be burning money? Would it take us over a year to put more than 25% of this capital to work?
2. Could we hit a meaningful Value Inflection Point with less?
3. Would raising less be a smart decision for the shareholders? Or would it slow us down too much?

Keep it cheap, but don’t cut corners. Example: Full-time founders draw salary.

The number you end up at, round it up. That’s your Base.

Step 4: Factor in your Working Capital & Contingency

The worst thing you can do is go back to your investors 6 months after a raise saying…

Oops, we got it wrong, can we have some more money please.

You need a buffer, so if something doesn’t go as planned or takes substantially longer than expected, the company is still more than OK.

How much contingency a business needs is directly dependent on

1. The predictability of that business’s cash flows, and
2. Your team’s experience running this or similar businesses

The less you have of each, the more contingency buffer you need to incorporate into your cash flow projections.

Typically 20-40% of your Base is enough.

But if your contingency goes above 40% then you probably haven’t done enough homework & shouldn’t ask for money.

Step 5: Lay out the number

Once you’ve added your Base + Working Capital and Contingency, it’s time to give a concrete number.

We’re raising X million.

If the amount you’re asking for is between Z and X, then expect to get between 0 and 0.

Pick a number, and stick with it.

It’s just X million.

Your Ask Final Sense-Check

The last question you should ask:

Is the amount you’re seeking appropriate to the stage of your business?

If your number doesn’t match with what’s expected, you’re probably overreaching and need to reevaluate your value inflection points for something more achievable (or find a way to do it cheaper).

But in the end, you need to stand behind your Ask, look at your Value Inflection Points and say…

We can totally crush this growth path.

Here's how to get 1 actionable capital raise & business growth tip in your inbox every Saturday morning.