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Funding: Raise enough money to achieve a set of milestones that will attract a subsequent round of investment from new investors

startup excited

It’s been written about before:

Tom Tunguz “Raise enough money to achieve a set of milestones that will attract a subsequent round of investment from new investors.”

Mark Andreessen1 “Raise as much as you can without giving away control of your company, and without being insane. … In a normal scenario, raising more money rather than less usually makes sense, since you are buying yourself insurance against both internal and external potential bad events.”

There seems to a positive correlation between the initial fund raise amount and the likelihood of a follow on round. Note, this is clearly an instance of correlation and not necessarily causal. The companies that raise more money may be more likely to succeed or better able to raise a subsequent round of funding.

This data can help substantiate the thesis that you should raise enough to hit the next milestones and mitigate risk with a sufficient buffer to weather the inevitable bumps. Valuation for startups only increases on mitigation of risk. For example, in some seed stage companies, this can mean mitigating technical risk and building a working product. For a series A, this might mean finding product market fit and showing user engagement. For later stages, this can be demonstrating a scalable distribution channel and business model. Regardless of the stage, future rounds will necessitate mitigation of risk.Mark argues to mitigate financing market risk by raising at the max of the range that is possible. This make sense to protect against macro changes that change fund raising dynamics as well as gives as much fuel to hold on as long as possible. This can be detrimental because this ups the level of risk that must be mitigated prior to a subsequent round.In practice, for most early stage startups, the increments of funding look to be 12 - 18 months of runway. The round size varies with the team but you can use a rule of thumb of $125K / developer / year ($100K salary + 25% expenses).

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Good article.

Keep in mind it's easy to say "we should raise X" but it's hard to ACTUALLY raise X.

Also, as soon as you raise, the exit expectations change, you're now on the VC's track for a multiple. Can you take a larger share of a smaller exit without taking funding? How risky is this in the market your are in - will you be able to compete without taking money when your competitors are well funded?

All good questions.

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