RTC #22: How do you decide how much capital to raise?

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I hope you like it 😃

📢 Top 7 links of the week

• 10 non-obvious lessons learned from working directly under Mark Zuckerberg (Link)

• Meet the most successful VC investor today (13 IPOs & 11 acquisitions (Link)

• Your email response time as a founder predicts your future success. Does it? (Link) - My favorite this week

• Bill Gates flies to Berlin to discuss Germany's climate tech future (Link)

• The fastest-growing category of venture investment in 2024 (Link)

• What happens when startup accelerators fail? (Link)

📖 Report of the week

Smart energy grids. Voice-first companion apps. Programmable medicines. AI tools for kids.
a16z asked over 40 partners across a16z to preview one big idea they believe will drive innovation in 2024.

Big Ideas in Tech 2024 (by Andreessen Horowitz)

🤿 How do you decide how much capital to raise?

Over the last months, I have come across a phenomenon that I want to discuss today.

Founders appeared very fluid to me when it came to the amount of capital they asked investors for in their specific round.

I often heard answers like:

“We are raising [X]m but we actually do not need that much”

“Oh your minimum ticket size is [X]m, we can definitely increase the total round from [X]m to [Y]m - always good to have more money”

“For scenario 1, I need [X]m capital but if we go with scenario 2, I need [X]m capital. What would be your preference as an investor?”

To be clear, this is a pretty strong “red flag” for me as an investor.

I want you to show me that you have a clear and exact idea of the funding amount, backed by a solid plan for your company

I know that this can be tough and needs preparation…

But do not worry, I got you covered.

Here is a five-step plan for you to determine how much capital to raise.💡

1️⃣ Determine Your Milestones

Investors want to know how their money will be used to increase your company’s value. They need to understand the “story”.

Milestones differ between businesses and can include reaching product-market fit or achieving cash-flow break-even. But also more operational goals like revenue and user targets, or what major features will be live and when.

In practice, for pre-seed funding, the timeframe of the milestones for funding is slightly shorter and around 12 months. For all other stages, aim for 24 to 36 months (depending on your industry).

Pro Tip: When setting these goals, consider whether they will enable you to raise your next round on a valuation twice as high as the current round or to become profitable enough to avoid the need for further VC funding.

2️⃣ Make a Financial Plan to Calculate Your “Burn Rate”

Once you know the milestones you aim to hit, you need to make a financial plan to determine your burn rate to achieve them (the burn rate is defined as the amount of money you will spend after accounting for revenues).

Things to consider are for example:

• The hires you’d need to make

• The marketing budget you might need

• Product features you need to build

Don’t guess. Research market salaries, going rates for marketing, etc. Start to plug this into your financial plan.

👉 Now you know how much money you will spend over the period to reach your milestones.

A more comprehensive definition of Burn Rate? Check here.

3️⃣ Run Through Scenarios

Use your numbers to run through both optimistic and pessimistic what-if scenarios. Understand what your numbers will look like with low expenses, high expenses, and somewhere in the middle.

4️⃣ What % of Company Shares Are You Comfortable Selling?

This is an external factor. In theory, you can decide on how much of the company you’re comfortable selling. On the other side, given the increasing transparency on funding rounds market standards are pretty public. 👇

5️⃣ Find Your Valuation Range

This is the other external factor. Most commonly, the valuation of your startup is determined by how other startups at your stage are valued.

Pro-Tip: Market conditions and industries matter a lot. Use data from Crunchbase, Founder Insitute (see below), or Carta to get a feeling for the current valuations.

Now you are all set! 💪

You have determined how much capital you need, have an idea of what share of your company you most likely need to give away, and know where to look for the latest valuation.

Not sure about how to start the process and who to approach? Check out the below issues

• How to approach investors or VCs?

• Who to approach at a VC firm?

Explore further with these useful reads

📅 Calendar of main VC events in the upcoming weeks

“Networking is a lot like nutrition and fitness: we know what to do, the hard part is making it a top priority.”

May
• 0100 Conference CEE 2024 | Prague | May 14-16
• Impact’24 | Poznan, Poland | May 15-16
• Mashup | Malmo, Sweden | May 15-16
• Tech.eu Summit | London, UK | May 16-17
• Finovate Spring | San Francisco, US | May 21-23
• Infoshare | Gdańsk, Poland | May 22-23
• Viva Technology | Paris, France | May 22-25

👉 Get the full list of events in 2024 here

This was my first issue in the new and improved structure.

How did you like it? Let me know in the poll below.

Stay healthy,
Stephan 👋

Issue #22 | 14 May 2024