TL;DR: Enough to hit the milestones to raise your next round of funding
The correct amount of money to raise for your startup is “as much as you need to hit the milestones to secure your next round of funding.” It’s not rocket science, and yet the vast majority of founders I speak to are very vague about exactly how much money that is, and there are a lot of misconceptions about how to figure out how much to raise.
Being a startup on the VC treadmill is a phased de-risking of a business proposition. In other words, right now your business is indeed very risky because certain parts of your business are unknown. Therefore, you need to put together a minimum viable product (which is neither minimum nor viable, or a product) to test a part of your business model. Once those things are tested and proven, the company’s risk decreases and you can raise your next round of funding to take on the next leg of the journey.
The first mistake many founders make is trying to raise enough money for a certain number of runways, measured in months or years. That makes sense, but investors aren’t interested in keeping your startup afloat for the next 18 or 24 months. They are interested in keeping you alive long enough to reach certain milestones, which in turn are indicative of risk reduction.
Let’s take a closer look at how best to design your startup’s journey through the different funding stages – and detail how much you need to raise at each stage.
The best way to think about how much to raise for this round is to think about what you need to achieve to raise your next round. That means considering the specific milestones you need to achieve to prove your business is moving in the right direction. These milestones can be: