Many founders often ask me how much money they should raise - especially when it comes to their first funding round. Should they aim to cover three, six, twelve, or eighteen months of operations?
Unfortunately, there is no silver bullet. The rule of thumb is that you should raise enough capital to get you to the next milestone and those milestones, and the amount of money required to reach them, vary from company to company.
In this article, and the corresponding video, we discuss how to properly set those milestones in more detail.
The Friends and Family Round
The Friends and Family round is typically the very first round. At this stage you may just have an idea, but not yet a product and not yet a track record where you have demonstrated your ability to execute. Thus you can’t quite meet the investment requirements of professional investors and have to approach those people who know you personally, who trust you, and who believe in your vision as well as your ability to bring it to fruition, or your friends and family.
This round is the most expensive as it carries the most risk and thus it is usually done at the lowest valuation. Therefore, you should plan to raise the minimum amount required at this stage and plan to close the remaining funding at subsequent rounds and at higher valuations.
The goal of this round is, simply put, to get you to the point where you CAN raise money from professional investors. This typically requires you to create a minimum viable product for a software company or a product prototype for a product company as well as to (ideally) validate your product-market fit, or ascertain the demand for your solution.
Validating product-market fit significantly increases your chances of closing the next round. The inability to gain traction is one of the biggest reasons why most startups fail to raise subsequent rounds of financing and go out of business. In his book, “Traversing the Traction Gap”, Bruce Cleveland from Wildcat Ventures discusses a four-step robust framework any company can use to solve that problem.
The goal of the next round is typically to fully develop your product and sometimes also to launch it.
Alternatively, you can raise two separate rounds for launching your product and then for scaling it. We recommend you set specific revenue goals for these rounds as well as define a core set of features for your product.
The dollar amount of the raise
For each round, the dollar amount of the raise is not determined arbitrarily and is not a fixed amount. In our blog, “How to Properly Calculate Your Funding Needs”, we delve into what constitutes the company’s funding needs in more detail. However, the amount of time over which you calculate those funding needs depends on the goals you are trying to meet, or your milestones.
For more details on how to determine your funding needs using a real company example, take our case study Course # 4.
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