Raising Venture Capital: How Much Money Matters

Perspective, Pontification and Propoganda about Entrepreneurship and Venture Capital, brought to you by David Hornik of August Capital.

Raising Venture Capital: How Much Money Matters

After watching a bazillion venture pitches, I've come to the conclusion that every VC Pitch should end the same way -- with the ask. If you want to crescendo into it, feel free to summarize why it is your technology is life changing, but finish with the ask -- "we are looking to raise six million dollars." Don't beat around the bush. Come right out and ask for the money. After all, that's what you're there for.

There are a number of reasons VCs want to hear what you're raising. And it isn't just the obvious one. Yes, it is helpful to know how much money a company is hoping you will invest. But there are other more valuable pieces of information that come out of the ask.

First of all, the amount of money you are raising is a good general indicator of how much you think the company is worth. I was in a pitch once learning about pretty interesting but pretty early stage technology. From where I sat, it seemed to me that the company could use single digit millions to take the technology to the next step. Yet, when we got to the slide that stated how much the company was raising, I learned that they were hoping to raise more than $50M. By my assessment, $50M would buy the vast majority of the company. Clearly the company felt differently -- they were hoping to sell closer to 20% of the company. It certainly refocused the conversation on what the company felt was the justification for such a high valuation and led to a very interesting discussion of the underlying economics of the company's business.

The thing I find most interesting about how much money a company is raising is not the actual number itself, but rather the conversation about how the company arrived at that number. What is interesting to me is what the company plans on doing with that money? What are the milestones the company can reach with that much money? Could they do it for less? What would they do if they had more money?

For me, the right question isn't "how much money do you want to raise?" The right question is "how much money should you raise?" Ask some entrepreneurs and they will tell you, the right amount of money to raise is as much as they possibly can (some recent monster financings suggest that strategy). That makes no sense to me. The right amount of money to bring into the company is enough to reach sufficient milestones to raise more money at a higher price at a future date (or, in some rare cases, enough to get to cash flow positive). If all goes well, the money I invest will be used to drive all sorts of risk out of the business, enabling the Company to raise the next round at a much higher valuation.

Figuring out the right amount to raise is more art than science but can have a big impact on the Company. If you raise too little money, you may run out before you have proven the business sufficiently to raise additional capital. In other words, raising too little money can be fatal. On the other hand, if you raise too much money early on, you could well be selling off too much of the company for too little capital. Companies should leverage early stage venture money to drive up the value of the company (by proving out as much of the business as quickly as possible), so that the next time the company fundraises, they will be able to bring in larger amounts of money while suffering smaller amounts of dilution.

Unfortunately, the perfect amount of money to raise is not always obvious. So the question isn't whether a company is raising the "right" amount of money. The question is, "why is the company raising the amount of money it is raising?" A great deal can be learned about a company from their answer to that question. So when you go out to raise money, be prepared to not only answer how much you are hoping to raise, but also why?

08/27/2008 in Management Issues, Presenting Your Company | Permalink

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"Failure to execute operationally is not the only source of risk; every venture is also subject to volatility in the price and availability of capital due to the volatility of the stock market. After the collapse of the Internet Bubble, many promising companies foundered because their funding dried up."

- William Janeway, Managing Director of Warburg Pincus

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