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Fundraising and Risk

Posted: October 12, 2014 by Dov Rosenberg in Money, Planning, Startup

dov-rosenbergOne of the most frequent questions I get from entrepreneurs getting started is, “How much money should I raise?”  In the imaginary world where startup pro formas originate, it is clear how much total capital will be needed to build the business to breakeven, but not when each portion of that capital should come in.  And how you answer that can have a significant impact on the amount of dilution you take over time as a founder.

One extreme would be to just raise all the money up front.  While this approach greatly reduces the total cost of fundraising, it will almost certainly be a worst-case scenario for founder dilution, assuming your valuation goes up over time (which it always does, right?).  So, raising all of that cash at the beginning is obviously not the solution.

Perhaps you could try to raise cash just-in-time, as you need it.  By never raising more than you need, you would minimize the dilution that you’d take overall, again assuming your valuation continues to increase.  But there is a cost to fundraising, including things like your time and effort, out-of-pocket travel and legal expenses, and so on.  And the more times you do it, the more times you disrupt your business and put needed growth expenses on hold.  Definitely not an effective way to grow a company.

So where’s the happy medium?