Welcome to the Dreamit Dose. In about the next five minutes
we'll talk about how to answer this question with confidence.
How much money are you raising?
You don't want to say too little. You don't want to say too much.
And you're probably thinking is there some secret formula?
Actually, there is. So, let's dive in.
One of the most common questions we get
from companies that first come into Dreamit, is all around fundraising.
How much should I raise? How much should I say I'm raising?
And what do I show on my use of funds slides?
So what's the secret? How do you start thinking about that?
First, let me tell you the big mistake that we see startups make all the time.
It's the amount of dollars that they're looking to raise is not tied
to the critical goals for their company's growth.
What's it tied to? Number one thing we'll see on a slide.
We're raising three million dollars because that buys us 18 months.
And you know what? Time is not a fundable milestone.
And an investor has no care in the world how much time it buys you.
They want to buy learning. They want to buy goals.
They want to make sure they're investing in things that are right for your company's growth.
Time isn't that.
So, what's the answer? It's all around the fundable milestones that you need to get to.
What are your fundable milestones? What's the next value inflection point?
Or, it might be that you're going to get your company to cash flow break-even
and you don't need to raise again.
So I want you to think about what milestones are going to create
large value inflection points that you could then raise again?
Let me give you some examples of that. Maybe it's that you do a big product release.
Maybe it's that your MRR or your ARR gets to a certain number.
A lot of times we see most of our companies have to be doing one to two million dollars
in ARR to get to their Series A or Series B depending on which vertical they're in.
Maybe you're dealing with a medtech product that needs to get FDA clearance.
Getting an FDA clearance is a huge value inflection point. It's a big funding milestone.
Or, you're running something in a biotech and you have to get
to a clinical trial or get through a certain phase.
Value inflection point.
Maybe it's the number of users or number of customers that you have.
Again, big value inflection points.
Those are the kind of things that investors want to see.
Now there's one other way I want you to think about this for the amount of
money you're going to raise and it's something that's important to think about.
In very early-stage companies like Seed and sometimes Series A companies,
I think about, and this is just my opinion, the 20 percent ratio.
The 20 percent ratio says, if you tell me how much you're raising
I'm going to tell you what your valuation is.
It's a different way to look at things. This is more about the amount that you're raising.
But if you tell me that you're raising three million dollars.
Well let's see, three million $’s is 20 percent of what number?
It's around 15 million dollars. So if you told me you're raising three million dollars,
I have to believe that, post money valuation,
your company is going to be worth around fifteen million dollars.
In very early-stage companies, the valuation is almost kind of pegged.
It's mathematical. It's the 20 percent ratio.
Something to keep in mind when you think about how much you're going to raise.
So next, let's drive a little more deeply into how much.
So again, you need to figure out your milestones and your goals.
And then the question is, how much cash is it going to take you to get there?
Now, when you're calculating the cash, let me tell you a little secret.
Most startups are pretty good at figuring out what their expenses are
but they're horrible at forecasting revenue. Really, really, bad.
I mean, they can forecast, but they can't forecast accurately.
So you need to be really careful on both the expenses and revenue flowing in
to figure out how much additional capital you're going to need to raise
to make sure you can hit those milestones.
Remember, it almost always takes longer to hit those milestones.
It takes more time and more money. So you want to be super careful in these calculations.
And then, add an extra three to six months of cash
because it usually takes about three to six months to close a round.
So you want to make sure you can hit those milestones
and have enough cash to close a round.
And we've seen this more than once, and we see this with a lot of startups.
Hey, good news! We've got FDA approval.
Bad news. We're out of cash in two weeks.
You don't want that happening to you.
You want to line everything up and make sure you have the cash
to get to those fundable milestones with enough room to raise that next round.
Next up, what are you going to use it for? Ahhhh, the use of funds slide.
Remember the basics of sales. Like when you're selling your product they always talk about
customers buy benefits they don't buy features.
You know what, investors do exactly the same thing.
They want to know what are the benefits they get from this cash being invested.
They don't care about the feature. Want to know the mistake we see most
startups make from a feature point of view?
They put up their use of funds slide and what do they talk about?
I'm hiring three salespeople, five developers, and two customer service representatives.
Those are all features. Who cares.
And I'll talk to a startup and say you're hiring all of these people for what?
Well, we're hiring salespeople. Why?
Because we're trying to generate more revenue. How much?
And then they'll finally get to the amount of revenue
and the use of funds is going to drive that revenue and
how they're going to drive it all the way through their model.
Remember, revenue is the ultimate benefit for investors.
So as you go through your use of funds, everything needs to level up and support
how you're going to achieve those revenue goals.
Last big thing I want to point out is when you're raising this round
what are you calling it? I mean, I know you're calling it a round,
but I want you to be careful.
A common mistake we see is that companies go a little too fast through the alphabet.
Only call it a Series A, if you've already raised a Seed.
Only call it a Seed, if you've already raised a Friends and Family.
That's why you see sometimes startups will say well we raised a Seed
and now we're raising our Seed - 1 and our Seed - 2.
They're trying to slow it down. What are they trying to do?
They're trying to make sure they don't burn a letter.
Don't burn a letter unnecessarily. Because as you go further in those letters,
as you go into Series A and a Series B, those letters set serious expectations
for investors and it changes the optics.
There is an expectation in Healthtech and Urbantech and Securetech,
the verticals we work in,
if you're raising a Series A, you better be doing over a million dollars ARR.
Otherwise, you're not in Series A territory. Just be careful what you call it.
That's it. That's how you figure out how much to raise,
what to tie it to, and how to talk about it to investors.
So remember, what cash gets you to your next fundable milestone?
And add three to six months to that so you have enough time and room to raise.
What do you need to get to that next value inflection point?
State your measurable goals which are driven by benefits. Don't talk about features
like the number of people you're going to hire.
Remember, time is not a fundable milestone.
Sometimes investors will do these calculations based on the 20 percent ratio.
And watch what letter you use to describe that round.
It sets a lot of expectations.
That's your Dreamit Dose in about five minutes.
Please leave your questions in the comments section.
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Really looking forward to answering your questions the comments section.
See you next time.