by Nick Mikhailovsky, CEO and Co-Founder of NTRLab.
Marc Andreessen said, “…the life of any startup can be divided into two parts – before product/market fit and after product/market fit.” It’s a kind of magic thing, without which a startup stands little chance of success. That said, how do you define it beyond “you know it when you see it?”
I just read an interesting article on Business Insider.
Yossi Vardi, a well-known Israeli investor, warned startups to be careful raising too much capital early, because it makes you “cash flow negative from the outset.”
Sam Altman, president of top startup incubator Y Combinator, said something similar a year ago. His point was that raising money at very high valuations, especially early on in seed rounds, leads to high burn rates and messes up the culture — “Frugality is sometimes incredibly important for startups.”
Image source: here
That reminded me of the 40% rule for SAAS companies that I read about on Fred Wilson’s blog.
So, how much should you raise?
Although one size doesn’t fit all, a good rule of thumb is raise only as much money as your company needs to achieve major proof-points/milestones and practice frugality to keep a low cash burn rate, which impresses investors.
Don’t be tempted to raise as much money as you can. This is not a good idea from a financial strategy standpoint. Less capital gives you greater ownership over your company. It also forces you to take your time before scaling, which is a good thing.
You don’t need to raise a lot of money to be successful. Your capital efficiency (that is, raising what you need and no more) is a more telling indicator of your startup’s success than high valuation.
And be sure to read The Risks of Raising Too Much Money Too Soon by AJ Agrawal, CEO of Alumnify for even more insight.