Dear Dr. VC,

I’ve got a few questions on how to plan for funding rounds.

Our small company has just won an invite to present to a prestigious west coast VC, where two board members will be present (woohoo, that’s a really big thing for us).  So now we’re going down the checklist…

-          Wow factor presentation of our prototype, check

-          Solid case for how it will be profitable and differentiated, check

-          Milestones planned for cash needed and revenue projections, check

-          IP - patent application submitted, check

-          Team – the CEO and CTO have had GM and director equivalent positions at a large blue-chip tech company, and have also bootstrapped a previous startup that broke even after 3 years.  for the Team item, half-check I guess? J

The problem is I’m not sure what the latest thinking is on the best way to stage funding requests.  Questions are:

1)  Should you ask for only enough to reach year 1 milestones?  Reason being you can ask for year 2 money when the company has potentially higher valuation.

2)  Is it odd to even work in 6 month funding rounds?  I ask because our milestones are very concrete along 6 month periods, so this is really an extreme version of question 1.

3)    Or should you ask for as much as possible up front?  Reason being you don’t have to be in fund-raising mode as much.

4)  If we are successful with one VC should we still pursue other VC’s to participate, or is this something deemed undermining?  It’s not uncommon to read about multiple firms involved in a deal, but I’m not sure when and how this is appropriate.

Btw, if it matters the numbers we’re talking about here are roughly 5MM year 1 and 8MM year 2.

Input greatly appreciated -

Regards,

LongView

Longview, great questions and good luck with the presentation.  As far as how much money you should seek...the more the better!  While it makes sense to postpone raising more money until the company has achieved certain milestones, and thereby allowing the company to command a better valuation, the truth of the matter is this: Raise as much as you can, as soon as you can.  I have seen far more companies and entrepreneurs crash and burn because they didn't raise enough money (usually because they didn't like the valuation) than I have seen companies/entrepreneurs sad/upset that they sold too much of their company at a lower valuation.

So while it makes sense to answer "yes" to your question #1, and this is what may play out for you, the reality is...raise as much as you can when you can!  Laying out specific milestones (#2) is great, but the odds that you'll hit those milestones exactly as laid out are pretty low, especially if you such a tight schedule (e.g. six month increments).   

Regarding #3, sure, why not?!  I'd tell the VCs that you think it will take X years and Y dollars to bring to company to breakeven.  Tell the VC that you're open to receiving a full investment now, or, if it makes more sense, you'll do the increment thing.  Chances are, the VC will continue to fund the business as you hit certain milestones.  It really depends on what the VC wants to do.  In fact, instead of coming with a certain plan, I'd rather engage the VC in a dialog to determine his preference.

Regarding #4, yes!  Absolutely talk to other VCs!  You would be foolish if you didn't.  As far as multiple firms, it usually comes at the behest of the lead VC.  Once you have a firm that will "lead" the round, that is, put in the largest amount of money and set the valuation, other firms will likely follow.

Hope this helps, let us know how it goes.

 

Dr. VC
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Cynicism is not an end, but a means to reach objectivity.