Fundraising · Startups

What is your take on raising more funds than the actual capital you need to execute? Good or bad idea?

Syam Vemula Senior BI Consultant at InfoMagnus

December 1st, 2016

We are working on fundraising for our new product. We know approximately how much resources we need but we are trying to raise some 10% to 20% more for some unexpected costs?

Is this poor planning or it is ok to raise more money to be on the safe side? Anyhow, if we manage to raise more we will again invest it. I don’t see it as a bad thing. What do you think?

Andrea Gentili COO (and co-Founder) at Kobo Funds

December 1st, 2016

Raising a bit more money and being on the safe side is a good move. However more money means more dilution for you too. Try to find the right trade off between safe net and dilution 

David Rowell CEO & Founder at LifeLinker Inc

December 1st, 2016

Sorry, but to suggest a startup will know exactly what its future costs will be is laughable nonsense.

Who can truly predict the future?  Who knows exactly what software will cost to develop and how long it will take (no matter if they have a 'fixed price contract' or not).  Who knows what the final manufacturing cost of a unit will be that has yet to even be prototyped?

I could write in greater length on this, but either you know this or you don't know this, and it is sort of topic drift too.

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

December 1st, 2016

You can never project exactly what you might need. Having too much is a much smaller problem than having too little. (No rational investor will object to you raising a capital "safety net.")

David Rowell CEO & Founder at LifeLinker Inc

December 1st, 2016

In the past, I have tried to balance the concepts of raising too little and alternatively of raising 'too much'.  The concept of too much, in my case, has been based on the expectation that each time we seek funding, our company has increased in value and so we can sell shares for a higher per share price.  In that context, it is better to sell eg 100,000 shares now for $5 each and another 100,000 shares later for $10 each.  So I preferred the concept of getting funding in small drip-fed amounts.

This seems intuitively sensible.  But, conventional wisdom says you should have sufficient funding for 6 - 12 months.  And it is easiest to raise additional money when you're not visibly desperate for funds.  You probably know the saying "The easiest way to raise money is to show you don't need it".  And, similarly, "The best time to raise money is when you already have lots".

Having suffered the consequences of not having a 6 - 12 month 'runway' of funding, I'd now much prefer to sell 'too many' shares at 'too low' a price.  The value in return - security for extended continuing operations - is worth any amount of premium you might feel you're paying for it.

Raising 'only' 10% - 20% extra is very modest.  Depending on the product you are developing, many investors will tend to adjust your projections, increasing your costs, reducing your revenues, and lengthening the lead-times to get your product to market.  This would have them seeing a need for very much more than an extra 10% - 20%.  It is not unheard of for potential investors to adjust these items by a factor of two or more - obviously, the further along the road to success, the less these factors need to be adjusted.

No-one will accuse you of being greedy.  You are being prudent and protecting your future - and therefore, their future too!

My recommendation?  Don't just add an extra 10% - 20% cushion.  Make sure you have your 6 - 12 months of funding, and then add an extra 50%.  Tell your investors that by over-funding, you are reducing the biggest risk all new companies have - the risk of running out of capital.

Todor Velev Managing Partner, EEI Network

December 1st, 2016

Basically, if you ask for 50% or more cushion, you are telling the investors"give me your money for me to learn the business through trials and errores". Of course this is part of doing business, especially in a start-up, but think about the feeling of the investors when they receive such proposal :). 

Dane Madsen Organizational and Operational Strategy Consultant

December 1st, 2016

In uncertain times - like the ones facing us now - raise every dime you can get if the valuation is in the range. Not running out of gas is part of your job and no matter how much you think it takes to get to the next milestone, it will take more. Dane Madsen Dane@DaneMadsen.com 206.900.5852 Mobile Sent from my mobile device. Forgive typographical and grammatical errors.

Bennet Bayer Global CMO, Strategy & Tech Exec Ronin ♦ Mobile, Cloud, ICT/IDC, The IoE & Big Data Business

December 5th, 2016

General wisdom is whatever you think you costs will be be, double it.  The revenue you think you will earn cut in half and if you still have a business go for it.  25-years doing emerging tech that still holds rather true.  I suggest investors will be interested in what you plan to do with your ask (X) and what would be the acceleration if you receive more (Y).  Just be prepared to outline what you would do with the funds.

Martin Omansky Independent Venture Capital & Private Equity Professional

December 1st, 2016

Wrong button pushed. Sorry. Sent from my iPhone

Rob G

December 1st, 2016

i'd say plan for a 12 month runway and then raise 18 months worth.  10-20% cushion is too tight. 

Martin Omansky Independent Venture Capital & Private Equity Professional

December 1st, 2016

OK. Not a bad strategy, but one problem. Raising more cash than you need in an early round means that such extra will be more expensive. Sent from my iPhone