Wed, Dec 07, 2016
Having had this conversation a couple of times during the last few weeks, I think it might be worth elaborating here: When companies raise money, they have to think not only about how much they want to raise at which valuation but also the sequencing of their funding rounds.
Let me explain: I recently sat down with a startup which was putting together their first round of funding in the form of a $250k angel round. Their plan called for a follow-on seed round of about $750k to $1M within 9 to 12 months.
Now here lies the problem: As every entrepreneur who ever raised capital will tell you — it takes time. Even if you have funders lined up, until you have all your ducks in a row and the paperwork sorted, months can go by.
If your financing rounds are stacked too close to each other you will a) find yourself spending a good chunk of your time doing nothing but fundraising and b) typically won’t have enough time to create sufficient traction to demonstrate progress (and thus justify your next round and the higher valuation). To make things worse: point a reinforces point b.
A good rule of thumb is to raise enough capital to give yourself an 18 months runway (and 24 if you have to stretch it). This is usually enough time to create momentum to carry you from round to round and demonstrate the increased value of your venture. And on the other hand it is a reasonable enough amount of cash that investors don’t get gun-shy.
When you raise your round you already have to think about what comes after the round (which might be another round or profitability). This view heavily influences how you think about valuation and the amount of money you will raise. Sequencing matters a lot when raising capital.