During my volunteering work at Campus TLV, I work with startups on entrepreneurship skills and technology. One of the popular topics is the subject of this post: “How to raise money”. It’s a challenging topic on many levels. You wish to raise enough money but not too much. Why? because at this point of the startup’s life you are giving a slice of your company (=equity) to the investors and you don’t want to sell too much or too low. Here are few guidelines:
- In order to raise money for your dream you need to convince investors that you are the ‘champion’ of this domain. If you are currently not the ‘best’ in the world – think how you become part of the top 1% of people in the world that do X (when X is your product/service). Savvy investors knows that it depends on the team (=you) and its ability to execute against their ideas.
- Ideally, you wish to raise 12-18 months of cash. This amount should carry you to an impressive milestone. Less than 12 months might not be enough as after 6 months you will be distracted by the ‘raising money processs’ and not focused executing against your goal. Raising capital for more than 18 months is also not recommended, because potentially it means you are selling a slice of your company on the cheap, whereas in 18 months it could be worth a lot more.
- The impressive goal can be measured in traction (e.g. downloads, number of active users etc’) or by a goal like: positive cash-flow. It is very important to set a measurable goal and track your progress. Moreover, it should be impressive enough so it will give you the option to raise more capital in the future at better terms.
- When we are talking about valuation, especially, at these early stages, it’s tricky. You should do your ‘homework’ in order to bring realistic numbers vis a vis your options to monetize users. If you can validate your assumptions with data (even a limited beta test) – Great! No one like to argue with data.
- Try to dilute around 15% – It can be 20% or 5% depends on the market and yourself.
- “Do more with less” – In the past few years it became cheaper and easier to bootstrap a company.
- Can you show an impressive demo with $7K?
- Maybe you do not need
a lot ofcapital to become profitable?
- If you are not force to raise money – don’t!
On the fun side of things, I remember this from few years back:
Btw, #6 to buy something big – went very well during 2014, when facebook paid $19B for whatsapp.
And for the ones who understand hebrew – “How to raise money from VCs”