# Maximizing Your Startup Funding: Avoid Common Pitfalls
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Chapter 1: The Misconception of Raising Less
One of the most intense disagreements I had with my co-founders, Randy and Ken, revolved around the amount of initial funding we should seek. I was in favor of raising $11 million, while they proposed a more conservative approach of $6 million. They mistakenly believed that a smaller round would allow us to retain more equity, a notion I will address later.
The critical error of underfunding a startup is a frequent, self-inflicted wound. The common belief that securing a smaller sum is easier is fundamentally flawed. Let me clarify why this approach can be detrimental. It’s not merely about the equity dilution from raising insufficient funds; it’s primarily about the lack of runway, which can be disastrous.
When I inquire why founders opt for less funding, the typical response is, "It’s simpler to raise a smaller amount." This line of thinking suggests that angel investors and venture capitalists prefer to write smaller checks, but that is a misconception. Here’s why:
- Angel investors and VCs maintain a disciplined investment strategy, applying the same criteria regardless of the investment size.
- A smaller funding amount results in a shorter runway, leading to quicker depletion of resources and limited achievements. To attract additional funding later, you must demonstrate significant accomplishments, whether in revenue or technological advancements. How can you convince potential investors to back your startup if you haven’t shown sufficient progress?
This brings us to a pivotal question: How much funding should you actually pursue?
During my discussions with Randy and Ken, they were convinced that breaking our funding into two equal rounds would enhance our equity stake. To counter this, I organized a lunch meeting where I presented clear examples showing the benefits of raising a larger sum upfront. Randy, the more vocal of the two, was taken aback by my calculations, but I simply relied on basic arithmetic.
To further solidify my point, I arranged a meeting with our attorney, Marcia, who emphasized our success in fundraising. She told them, "You raised $12 million in this environment! That’s an impressive achievement!" To which Randy quipped, "It's not our first rodeo." It was a moment of levity.
One of the key takeaways is that you should strive to optimize for equity when possible, but more importantly, you need sufficient time to avoid being in a continuous cycle of fundraising.
If your funding isn’t sustainable for long enough, you jeopardize your chances of securing future investments. Here’s how this unfolds: Suppose you aim to raise $500,000. When you pitch to the first investor, they might ask, "How long will that amount last?" If you respond with "Six months," you’ve already lost their interest.
Ideally, your funding should last between 18 to 24 months. This timeframe accounts for the average six-month fundraising cycle, but be aware that it can vary significantly. In my case, my first round took over two years due to the Great Recession.
It’s crucial to recognize that investors typically fund only one startup for every 100 they evaluate. Even if your company is exceptional, potential backers may pass for reasons unrelated to your business. For instance, they might be engaged with other investments, making it impossible for them to work with you.
This illustrates the necessity of allowing more time than you initially anticipate for securing funding.
Who Should You Approach for Funding?
This raises the question of whom to consider as potential investors. There are four critical factors to evaluate:
- Geographic Location: As Marc Andreessen famously stated, location risk is significant. Investors often prefer startups that are easily accessible to them.
- Funding Round Stage: Different investors specialize in various stages of funding. Late-stage investors seldom back early-stage startups.
- Target Amount: Research typical investment amounts for potential investors. It’s unlikely that an investor who typically commits $10 million would be interested in investing $500,000, as it may not yield a meaningful return.
- Business Type: Most investors concentrate on specific sectors. For instance, a medical device investor is unlikely to invest in a software company.
Understanding these factors is crucial as you navigate your funding strategy. Avoid the grave error of assuming that raising a smaller amount will simplify the funding process.
Chapter 2: Key Insights on Startup Funding
Learn how to raise more venture capital than you actually need and improve your funding strategy.
Discover three crucial aspects that entrepreneurs often overlook when seeking startup funding.