When I’m mentoring a founder that is looking for fundraising advice, one of my first questions is “How much do you need to raise?”
More than 50% of the time, I get a response that sounds like this:
“If I can raise $50k, I’ll use it for this. And if I can raise $100k, I will invest it over here. And if I get another $25k, I can do this.”
There is no connection to these piecemeal investments to an outcome. It’s a series of tactics.
This is the wrong way to think about funding your company, regardless of whether you are planning on raising successive rounds of capital, or you’re trying to get to cash flow positive as fast as possible.
You need to have a financial plan that is built around key milestones on whichever path you’re trying to get on.
If you’re raising now with the hope of raising again in 24 months at a higher valuation, you need to understand what your key business metrics will need to look like in 18 months in order for that process to be successful. You then need to back into the specific investments you need to make to hit those milestones. And then you need to raise that amount plus 25% to give yourself some room to make the inevitable mistakes.
And if you can’t raise the full amount of investment that you need right now to hit those key milestones in 18 months, you need to rethink your plan and reset your expectations.
For example, if you want to be able to kick off your next fundraise process in 18 months, you might determine that you need to have a base of 1,000 paying customers subscribed to your higher margin tier of products. You then back into the investment you need to make that happen, which might include hiring two developers to build out the product and marketing spend to attract those paying customers.
After you’ve built that plan out, you decide that you need $500,000 to be able to execute this plan within 18 months.
If you can only raise $200,000 in this round, you have a big problem. You can’t execute against a plan that requires $500,000 of investment with only $200,000. So you need to decide if there is a different, more viable path with the lower round of investment.
Otherwise, you’ll raise the $200,000, only to find you have too little to show for it in 18 months, which will leave you unable to raise your next round. This is the path to running out of cash.
On a regular basis, I meet with founders that have invested in the product but have no cash for marketing to build a customer base. You can’t demonstrate product-market fit if you have no money to market your product!
Before you go out and kick off a fundraise process, do the work of figuring out what you are trying to accomplish over the specific timeframe you expect the funds to last. Be clear on the level of investment that’s required to achieve those goals. Be able to articulate the alignment of your fundraising goal with the way you’ll invest those dollars to the outcomes you expect.
And if you can’t find a path to raise as much as you think you need, stop and reset the plan until you get to something that is more viable.