Rule #20b – Raise the Money you need, not the money you want

Now that we have established that the money you “raise” should be treated like you walked down to the local bank and signed your life as collateral, we need to tackle the question of how much money you should be raising in the first place.

There are some very, very successful people who have a much different view then I do on this. Marc Andreessen, who churns out billion dollar startups almost as often as Lindsey Lohan goes to rehab, loudly declares you should raise as much money as possible. His idea is (in a nutshell) based on the fact that you won’t go out of business with money in the bank, you never know if there will be more money available later, and the risk of making a buyout financially impossible pales in comparison to the real chance that having too little money will kill you.  All of these are good points.  And at which time you have the capacity to raise 44 million dollars in one round for your startup (as Andreessen just did with Ning), I will only say, “knock yourself out.”   You get people with 44 million dollars to answer the phone and you clearly don’t need my advice.

So, how much money should you raise to get your business or idea to the next stage? Some people may tell you that you need to find a fair valuation for your company or decide on a percentage to sell off blah blah blah. The fact is that unless you have absolutely hit it out of the park alread, the first chunk of change you raise will be from people you know who believe in you as a person and really don’t care too much about your idea.  They have a couple grand lying around and want to help you achieve your dreams and if they get a little something along the way, all the better. The specifics will vary, but that’s usually how it goes the first time out of the gate.  My recommendation is you raise the money you need, not the money you want.  

I’m essentially advocating a strategy of just barely going beyond “self-funding” or “bootstrapping.”  I’m suggesting that you take the bills you have as they apply to your startup, project them out for a year and raise exactly that much money.  In a perfect scenario, you would follow the old adage to “raise the money you need for a year!” and then take not a penny more.

The reason for this uber-conservative approach is simple:  as I said before, at the early stages of launching a startup, having money is going to create more problems then solutions.  Raising a smaller amount of money will give you the freedom to work on the project and business without having to sweat whether or not you can cover the cost of your internet connection.  Having a small amount of money will also implicitly keep you from doing stupid things like hiring a VP of Sales or making 100 T-Shirts with your cool logo on them.  I.e., not having much money will keep you from wasting it.  As I said before, if you think that would never happen to you, you’re being naive.  Even the tiny stuff – “Let’s buy the office a Starbucks this morning to reward everyone’s hard work!” – will snowball until your working capital has returned mere pennies on the dollar to you.

Why?  The moment your account becomes bloated with more money then that small amount, you will be tempted to spend it.  Even worse, the people who have invested will start saying, “Why is my money in the account…?…why is there not more staff…?…why is this still not launched…?…what is the deal here…?…WE HAVE MONEY!!!”  Even if you heed my warnings about having too much money in the account, the people who put it there will more then likely NOT understand your reluctance to spend it.

People – investors, specifically – think that money solves all problems in a startup.  Of course it doesn’t; it masks them.  Money covers up a lack of strong work-ethic.  Money covers up timelines that pass.  Money covers up lack of talent.  Money covers up poor communication and a dead market.  Money covers up lack of a business strategy.  On and on and on.  I’ve seen it plenty of times and from all directions and can say with absolute certainty that at this point, you will get more done with $100 in the bank then you will with $100,000 because you won’t have the fall back of saying, “everything’s fine…we have money.”

Raise the money you need to allow you the freedom to get to the next step of your journey.  Not a penny more.

2 Responses

  1. I do agree with you, however the investors are relying on you to produce on what you have raised. If you miss your projections or unforseeable events take place delaying a launch, investors may not be willing to buck up again.

  2. I would like to see a continuation of the topic

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