How much should I raise?

Every founder raising capital has asked this question.

The basic answer is something like raise enough to hit your next set of milestones. Or raise enough to achieve traction. Or raise enough that you’re able to do something so impressive that investors want to buy your stock for lots of money.

That’s a good start.

Assuming you can figure out what that advice is aiming at—month over month growth? gross sales? logos? demos?—whatever it is, if you figure that part out it gives you a good framework for calculating your “best case scenario” raise. Make a reasonable guess at how long it will take to hit those milestones, how many employees you’ll need to get there, what kind of software you’ll need, how many gallons of craft beer you’ll consume, and stuff like that. Add it up and you get a reasonable burn projection: the amount of cash you’ll need to get to the point where you can raise more cash on better terms.

Unfortunately, even your most conservative estimates will often be an order of magnitude too optimistic.

Things happen.

You get sued by an incumbent competitor and they bury you in paperwork.

Or a great opportunity arises but seizing it will cost you.

In an episode of the Founders podcast about Sol Price—who founded the precursor to membership-retail concepts like Costco—David Senra describes how Sol budgeted $500,000 to open his first store. He and his investors gradually and painfully discovered that it would take $5,000,000.

Point is, forecasting is worth doing, but if you’re doing something that nobody has ever done you’re not likely to get the forecast right. (”Plans are useless. But planning is indispensable.”) So do the planning. Then raise as much as you can.

That is—as much as you can without suffering intolerable dilution.

Intolerable is a subjective metric. But consider this. Dilution is a “penny wise, pound foolish” thing. You can minimize dilution today by raising just enough to survive your best-case scenario. Obviously, statistically speaking, that might work. It has happened!

And I’m sure I’ve seen it work, though I’m struggling to conjure an example.

What I’ve seen more often is this: Entrepreneur raises on rosy estimates. Entrepreneur misses estimates. (I don’t need to tell you, but this stuff is hard!) Cash is burned. Payroll is looming. No major milestones are achieved. And, so, entrepreneur calls up investors asking for more cash. (”We’re so close!” Which is probably true.) Entrepreneur gets the cash. But—spoiler alert—it’s not cheap; it’s expensive because: The valuation drops. (A dreaded “down round.”) Investors demand concessions: Control. Dividends. Preferences

Silver lining: your 409A valuation drops too, so your employees get cheaper options.

Now imagine that our entrepreneur started by raising 2x the best case scenario. Or raised a quick, small round on decent terms—maybe a SAFE—and used the extra runway to negotiate a larger round on better terms?

Of course, that might not be possible. Sometimes you just take what you can get and grind it out.

This isn’t a science.

But here’s the bottom line: Raise as much as you can when you’re not desperate—when you’re hitting milestones. Don’t give capital leverage through your poor planning, optimism, or miserly stance on dilution. The extra dilution you give up now from raising too much will more than offset the risk of punitive terms you face from raising too little.