The company I work for is in the midst of raising a Series-B capital round from a VC syndicate. Over the weekend, our discussion revolved around how much we should raise. We focused on raising the optimal amount of capital; not too much or too little.
Raising capital is dilutive to existing shareholders; thus, it’s best to avoid raising more capital than necessary. A raise of approximately 18 months of cash is a good rule of thumb. Raising more than 18 months means you could be sitting on cash that you raised at a low valuation, although your company is now worth much more.
Raising capital is time consuming and distracting. Raise less than 18 months of cash, and you’ll have to go through the fundraising process again before you know it, which could result in the business suffering operationally.
Calculating how much cash you need to operate for 18 months is easy. Simply calculate your current monthly cash burn rate (a Sources and Uses statement will help), and then extrapolate that burn rate out 18 months, adjusting for additional cash-burn that comes with growth. Alternatively, If your company is likely to achieve break-even sooner than 18 months, you’re better off raising exactly enough to get to break-even.
Your unique fundraising environment will dictate the structure of the round. I.e. if you’re desperate for cash, and there aren’t many investors, you could be selling 25%+ of the company. If you’re the hot company on the block, with multiple competing investors, you’ll sell 10% or less. As a general rule, 10-20% dilution for 18 months of cash burn is typical.
Additionally, it may be worth paying a premium to ensure you’re partnered with the right investors. Target the 10%-20% range, but consider the value added by each competing investor, and normalize valuations accordingly.
The key is to minimize dilution to existing investors (which will maximize their value upon an exit event), while raising enough cash to operate and grow the business, allowing the company to reach said exit-event. It’s a fine line.