How Much Are You Raising? ??

Dear Founder,

How Much Are You Raising? ??

Amidst the glossy TechCrunch headlines of companies raising millions of dollars, it's easy to evaluate a startup’s success based on how much they raised. The reality is, this means very little.

In my opinion, we over-celebrate fundraising.

Beehiiv, the newsletter platform, just raised a ￡32M Series B. The founder, Tyler Denk, tweeted, "The money hit the bank, but rent is still due, baby." There are no prizes for raising more than another company. The rent is still due.

But there is one question from VCs that’s unavoidable in fundraising…

“How much are you raising then?”

While there is no one-size-fits-all answer, there are wrong answers. Determining the right amount can be challenging. Here’s a straightforward guide to help founders make informed decisions.

Understanding Fundable Milestones ??

When planning your fundraising, focus on fundable milestones rather than time periods. Investors aren't interested in how long your funds will last; they care about what you will achieve with that money. Common milestones include:

- Product Launch: Launch a new software version, hardware product, or key feature.

- Revenue Target: Achieve specific monthly recurring revenue (MRR) or annual recurring revenue (ARR) targets, like reaching ￡1M in ARR to move from seed to Series A.

- Regulatory Approval: In healthcare or medtech, obtaining regulatory approvals or patents is significant for market entry and revenue generation.

Tie Funding to Milestones ??

Investors want to see a direct connection between the funds you are raising and the milestones you aim to achieve. Clearly articulate how the capital will be used to reach these milestones with metrics and timelines. For example:

- Monthly Recurring Revenue: "Increase our MRR from ￡50,000 to ￡150,000 in 12 months by expanding our sales team and running influencer marketing campaigns."

- User Growth: "Grow our user base from 10,000 to 50,000 active users in the next year by launching a targeted marketing campaign and improving user onboarding."

- Product Launch: "Complete development of our new software module and launch by Q3, expecting to increase our customer retention rate by 20%."

By tying your fundraising to these clear, value-driving milestones, you provide a compelling case for investment and set a structured path for your company’s growth.

Calculating the Right Amount ??

While there’s no exact formula, here’s a rough guideline to ensure you're in the right ballpark. Start by creating a detailed budget that includes all expected expenses: operational, product, legal, and regulatory costs. This is your burn rate.

Balance this against conservative revenue projections to avoid overestimating. Use various scenarios:

- Best-Case: Optimistic projections.

- Base-Case: Typical market conditions.

- Worst-Case: Potential setbacks or slower growth.

Add a buffer of 3-6 months to your projected timeline for unforeseen delays. For example, if you need ￡500K to reach your next milestone in 12 months, plan to raise ￡625K to ￡750K to account for delays and additional costs.

Fundraising can be lengthy, typically taking 4-6 months, so ensure you have enough cash to operate during this period.

Align with Valuation ??

For early-stage companies, the amount you’re raising usually represents about 20% of your post-money valuation:

- Raising ￡500,000: Post-money valuation should be ~￡2.5M.

- Raising ￡1M: Post-money valuation should be ~￡5M.

This sets realistic expectations for you and your investors, aligning your funding needs with your company’s valuation.

Here’s a simplified example:

Estimated Expenses for 12 Months:

- Operational Costs: ￡300,000

- Product Development: ￡150,000

- Marketing and Sales: ￡100,000

- Legal Fees: ￡50,000

- Miscellaneous Costs: ￡25,000

- Total Expenses: ￡625,000

- Revenue Base-Case Scenario: ￡250,000 (12 months)

- Net Funding Need: ￡375,000

- Buffer Period (6 months): ￡312,500 (6 x ￡50,000 + 25% buffer)

- Fundraising Cushion (6 months): ￡300,000

Total Funding Required: ￡987,500

The Past and The Future ?

To get investors excited, show how you used previous funds and hit milestones. Explain how the current round will help reach the next stage, planning for future fundraising.

Be cautious with terms like Series A, B, etc. Use sub-rounds like Seed-1 and Seed-2 to manage expectations and avoid advancing too quickly.

Why You Shouldn’t Raise Too Much ??

Raising too much in early stages can lead to overspending. Limited resources force you to make hard choices, which often results in creative solutions. Remember Airbnb's story—founders Brian Chesky and Joe Gebbia bootstrapped by maxing out credit cards and selling custom cereal boxes. This lean approach led to a better end product.

Lastly, raising capital dilutes your ownership. Amidst the glamour of VC funding, remember you're selling chunks of your company. Internalize this, and calculate again.

Best,

David

P.S. At Glenluna Ventures, we work with high-growth potential, ambitious early-stage startups. If you're a tech business looking to raise your next round or an investor interested in amazing businesses, drop me a message!

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