Q1 2020 Texas CEO Magazine

STARTUP SUCCESS:
A STARTUP FUNDRAISING SERIES
HOW MUCH
Should We Raise?
Gordon Daugherty
For most startups, the decision to raise
money is made out of necessity. The
entrepreneur needs more funding to
continue pursuing their dream, whether
the money will be used just to survive
a while longer or truly shift a gear and
move into the next stage of evolution.
Other startups pursue funding out of
want more than need. Usually, this is
because they either want to get more
aggressive in their growth or because
there’s some opportunity they want
to exploit sooner than when they
might otherwise organically. These
startups are in the fortunate position
of turning down the funding if the
terms, timing, or amount isn’t right.
But regardless of whether the
entrepreneur is pursuing funding out
of necessity or desire, they still face a
difficult decision: how much to raise.
Not only is the decision critical to the
startup’s own planning and forecasting,
but investors will want to understand
why the entrepreneur has chosen to
raise the stated amount of money.
The ability to demonstrate that they
determined the right amount of funding
for the company at its particular stage
is important for establishing credibility
with the investor. The entrepreneur
will essentially become the steward of
the investor’s money through multiple
rounds of funding, until they eventually
exit and the investor gets a return. Thus,
the investor needs to see a cohesive
fundraising strategy that doesn’t just let
the startup survive for a while longer but
rather allows them to reach future key
milestones for continuing to get funded
and eventually grow a great company.
Investors typically get a lot of unacceptable
responses when they ask why the desired
amount of funding is the right amount,
such as “Most other startups at our stage
seem to raise that amount,” “It’s the
most we think we will be able to raise,”
“It only dilutes us 25 percent,” and “It
gives us one year of runway.” These
responses might be true, but they are
all also terrible. This article provides a
framework for determining how much
24 Texas CEO Magazine Q1 2020