#26- Raising too much, too soon, is not always a boon!

How much should we raise right now? Oh boy! If only we had all the answers!

During my interactions with founders, I often receive this question - "How much do you think we should raise right now?". My answer almost always is the same - "Figure out how much do you really need, and raise a bit more than that!

It is only logical that founders think the more they can raise right now, the more resources at their disposal, the longer their runway, and a bit of war-chest to experiment freely. Fundraising is also a difficult, time-consuming, energy-draining task! No wonder founders want to raise as much as possible for two rounds worth! While there is no science or philosophy behind how much capital to raise, I only consider trade-offs.

No matter how much you raise, you will spend it all in 18 months

It is true. The more resources you have at your disposal, the more liberal you become spending them. You will hire the best talent, the best agencies, the best vendors that money can buy! And consequently, you will work hard to incorporate the best features in your product, test it at length, and bring it to market after the longest feedback drive you can afford - after all you have to justify why you did what you did!

Whatever you have raised, you will probably spend it in 18-24 months. A good rule of thumb to follow is to raise 1.5x the amount of money you need to survive, and budget to spend no more than 75% of it. But only if budgets worked that way!

Big things take time!

I've seen numerous pitch decks of early-stage companies that arrive at a fair valuation figure via DCF! Excel gymnastics will only work so far. Early-stage valuation is determined by two things - the cash you raise, and the equity you dilute! A general guideline of early-stage investing is that early investors would want anywhere between 10-20% of your equity for the risk to make it worth their while. There is no science behind this.

Most founders want to raise 5 cr for 15%, meaning a ~30 cr pre-money valuation. I understand the temptation to do so. A 30 cr+ valuation also sounds and looks better than a 15 cr valuation! But we believe a lower valuation, and funding ask leaves you in a better position - why?

If you are in the market to raise 2 cr at 10%, for starters it is far easier to raise 2 cr than it is to raise 5 cr. Many people will lead a 2 cr round, or even take it fully - helping you close faster. For a larger round, many investors would sit on the fence waiting for a lead to take charge - precious time wasted. Raise a smaller round, get your numbers higher, your next round will be bigger and better to raise.

The larger the round, the harder the hurdle

So you've raised 5 cr at 30 cr 18 months ago. And now you're running out of cash. Logically, now you will have to raise at least 10-15 cr, at 100 cr! For you to raise at 100 cr, imagine how should your business look like for you to command that valuation. The hurdles just became 2x the size. Imagine jumping a 60-inch hurdle!

Early investors typically want more than 5x their capital, and some super early angels are gunning for 10x. For you grow 10x from 30 cr is much more difficult than to grow 10x from 15 cr valuation.

Another problem with raising too much too soon is that if the numbers are not up to the mark, you have to raise a scrappy bridge at a down valuation. This has two effects - firstly existing investors hate down rounds, and secondly, it is a bad signal to a prospective VC when you raised a lot of money, but could not deliver. For that VC, there is always another deal to evaluate - why would they want to raise someone else's child?

Summary

There is no right or wrong answer here, only trade-offs to consider. Many have opted to fall for the fallacy of 'more capital will mean more freedom and longer runways' only to be in the market within 18 months to raise more money.

We understand fundraising does not bring joy. But we also understand that while having more money makes today easy, lower valuation makes tomorrow easier. It is for the founders to figure out what path they want to choose.

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