Q1 2020 Texas CEO Magazine

out how much to raise in order to accomplish a desired set of
outcomes. Next, a test-drive with investors helps inform whether
the valuation they’ll be able to negotiate derives reasonable
dilution or if they’ll need to adjust the amount, either up or
down. If they adjust the amount down, the significance of the
projected outcomes will also be adjusted down. That might cause
the round of funding to seem less exciting for investors, and an
adjustment may be necessary. These iterations continue until
the startup finds the right balance of outcomes and valuation.
Multiple rounds over time
Now that you understand the basic formula and framework,
let’s project forward to see how multiple funding rounds tie
together. As you can see in the figure below, with each round of
funding, the projected outcomes eventually become the state of
the business in the future. That is what the company uses to gain
the desired step-up in valuation for the next round of funding.
This cycle continues again and again until the company is either
self-sustaining or experiences an exit (acquisition or IPO).
Evolving from a bootstrapped startup to a funded one is a big
and important transition. A startup might end up as a funded
one out of need or want. If they don’t need funding, then
they have alternatives. Most startups eventually need outside
funding and, once that happens, many things change. One of
those things is they get to accomplish more and grow faster,
assuming they have a scalable business. But they will also
experience a change in accountability. No longer are they only
accountable to the founding team and other team members;
they suddenly have to answer to their new investors, who
might have different interests, beliefs, and motivations than
they do. The more investors they take on over time, the more
varied those interests, beliefs, and motivations will be, and the
more they’ll have to accommodate or negotiate with them.
Like many things in business, up-front time and effort spent
on fundraising strategy can pay huge dividends later. It
translates to increased odds of raising the right amount of
money to reach the next significant milestone for making
another want-versus-need decision and generally controlling
their destiny. Surely, they know things won’t play out exactly
as planned, but that doesn’t relieve them from the obligation
to start with a strategy. After that, they can do what every
great entrepreneur does—adjust and adapt as necessary.
Iterations to fundraising strategy may also happen as you
test-drive ideas and assumptions with investors before
actually launching the fundraising campaign. That takes place
during the planning phase of fundraising—and is the topic
of my article in the next issue of Texas CEO Magazine.
Gordon Daugherty is a seasoned business executive, entrepreneur, startup advisor, investor, and the best-selling author of Startup Success: Funding the Early Stages of Your
Venture. A proud native Texan, Daugherty graduated from Baylor University. He has vast experience with early-stage fundraising from both sides of the table, making more
than 200 investments and raising more than $80 million in growth and venture capital as a company executive, fund manager, board director, and active advisor.
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26 Texas CEO Magazine Q1 2020