One of the most often asked questions among founders is, “How much money should I raise?”
Naturally, founders want to raise as much money as possible because they figure it will give them more resources, and therefore, better chances of competing.
When bootstrapping, it is very tempting to look at well-funded companies and believe that the only way to achieve success is to get backing from venture capitalists or angel investors. However, this instinct of raising as much capital as you can to fuel growth might do more harm than good for your business. Here’s why:
1. You will spend what you raise in the same time frames whether you raise $2 million or $5 million.
The biggest case against raising too much money in the early stages of your startup is that it is increasingly likely to overspend within the parameters of a rather large budget, whether you need to or not. Having money to throw at your startup from day one produces a higher likelihood of ending up with a ‘quantity over quality’ approach. Less money to start with will ensure that you focus on growing your business at a steady rate while improving those aspects that cry for attention as they come up.
2. Wasting time
Even if you think you will be able to spend sensibly, there is the question of your time being taken up. Coaxing investors into handing over cash takes energy out of the actual running of your business. If another viable way of gaining funds is through generating cash flow into your business directly from consumers, then why not focus that time and attention on them?
3. Limits can spark creativity
Having limited resources forces you to make hard choices about what you want to build and what you don’t. It forces harder decisions about whom you’ll hire and whom you’ll delay. It forces you to negotiate harder on your office lease and take more frugal space. It also makes you think outside the box and come up with creative solutions to any problem you might come across.
4. Your business valuation may suffer
For starters, to raise a sufficient amount of capital, a startup has to dilute a large proportion of its own among the investors. A normal give up ratio an entrepreneur will be willing to give away is around 15 to 20 percent of holdings over to investors, but as a requirement of finance rises more stakes of ownership becomes investor-owned. This can harm the control of the entrepreneur on their business and might take down the valuation of the company in the future. With a favorable response from investors, the startup also receives high expectations to earn them huge turnovers.
5. Choosing wisely
The obvious consideration for an entrepreneur when they think about how much money to raise is also from whom they will raise the money. Knowing the style of the partnership will tell you something about what to expect if your cash starts to deplete and you’re not quite ready for the next round.
Fundraising isn’t the most fun part of the process, but it is a crucial activity of the business. It’s truly a marketplace where the validity of your idea is challenged and where your progress is measured. And while having more money makes today easier, part of your job as a founder of an early stage startup is to fight the temptation to raise too quickly and too much. Do it at the right time, and consider the trade-offs as you plot your journey.