This article was originally published November 15, 2016 on VC List.Your palms sweat, and your stomach churns. You might even feel an unexpected giddiness. That’s how it is when you’re about to ask for a big chunk of change from a potential investor. So you go ahead and make The Ask. Then they shrug their shoulders or raise their eyebrows. Why? Maybe they expected you to ask for more. Let’s take a look at what led you to this place, and how to make sure your fundraising plan doesn’t leave you short on cash.
Who Are You Asking?Funding sources come in all shapes and sizes. In many ways, you’re always fundraising. While tailgating at a sporting event or chatting at a family dinner, the chance to pitch your business is practically inevitable. Of course, some sources such as venture capitalists, private equity firms and corporate venture funds require a more refined approach. Don’t think that you have to ask everyone to invest though. Moving a startup through its various stages of growth takes time. Make sure you’re willing to be in contact for the long haul, and consider the impact of abandonment or failure for each investor. You can shop around, but you don’t have invite them all to your party.
Fundraising PreparationWhen deciding upon how much funding they need, startups typically ask for too much or too little. Believe it or not, the latter might be more common. Many entrepreneurs believe that the less they ask for, the better chance they have of getting funding. While this is partially true, serious investors value any comprehensive and realistic plan that generates revenue. In fact, Entrepreneur’s Martin Zwilling considers startups without clear business plans as nothing more than expensive hobbies. Even if your business plan is accurate, the other reason you’re asking for too little is related to your time horizon. Don’t plan for the next 12 months of funding, instead present an 18-month plan. Or, calculate what you need to get off the ground now, then add 6-12 months more of funding. This provides you with a cushion for two potential scenarios. First, you might end up spending more. Second, you may not make money soon enough and will need additional funds.
Calculation Take TwoAnother method for determining your ask value is by milestones. The advantage here is that it focuses on specific goals in relation to time. Milestones are events or achievements you can identify concretely in the life cycle of your company. These can be in terms of product development, team expansion or market adoption metrics. For example, your milestone schedule might look like this:
- Month 3: Minimal Viable Product
- Month 6: Private Beta Launch
- Month 9: Key Hire
- Month 12: Public Beta Launch
- Month 15: Reach 10K users
Be Careful What You Wish ForOkay, let’s admit it. Deep down every startup would love to have a generous investor swoop down and dump tons of cash into a project. But not so fast – because with big money comes big responsibility and probably some strings attached. For example, large amounts of funding might trigger:
- More stringent investor terms – They want more money back and more control.
- Post-money valuation problems – If you’re worth $1M and they invest $2M, your value will be adjusted upward. This makes future fundraising difficult since suddenly you’re “too expensive.”
- The Gatsby Effect – Can you resist the temptation to overspend with a full war chest?