Entrepreneurs embarking on a fundraising process struggle with this question. Will you suffer too much dilution by raising too much? Do you need to raise at least a certain amount to get the attention of certain investors? What if you set your sights too high and fall short?
I suggest that the answer is fairly simple, and should be guided by the needs of the company, not so much by the vicissitudes of the funding market. You should try to raise enough capital to achieve your next important milestone(s), plus enough for an additional three to six months of runway to enable your next fundraising process and to account for inevitable error in estimating the time you need to hit your milestones.
Determining your next important milestones is a non-trivial task on its own, but the first and most important hurdle should be that of the founders/management team. What do you need to prove to yourself to continue to invest your own time?
Often, entrepreneurs try to raise enough capital to hit several additional milestones (launch a product, hit a certain level of sales, etc.). The logic here is that fundraising is painful and distracting, so better to raise more sooner. If you can raise more money on acceptable terms, that’s fantastic. But be clear about the amount you really need to hit your next milestone (and raise capital after that) – that should be your minimum, even if raising that amount may put you back in fundraising mode sooner than you’d like.
Of course, if you are asked “Why don’t you raise more?” by an investor who seems interested, you should (happily) engage that question. Explain that you need a certain amount to hit your next milestones, but can put additional capital to good work (again, on the right terms). And, if you like, you can create an “aggressive” growth plan based on a larger capital raise than you might pursue as a minimum.
The important thing to remember is that you are raising capital to accomplish certain things – your milestone(s) – and to give you time to raise more capital if needed. Any additional funding is helpful, but only under the right terms.
