How much and when should I raise?

The second article of our Navigating VC Series aims to help CEO’s answer the tough question of when and how much capital to raise.

Firstly, congratulations! If you’re thinking about raising a Series A, B, or C you are already in an elite group of high performing companies. In 2018, 288, 100, and 40 UK companies raised a Series A, B, or C respectively (Crunchbase).

# of fundraisings by UK companies in 2018, by reported stage (Crunchbase)

Moving beyond seed is not easy. Of the 3.7k companies that have raised a seed round since 2011, only 29% have gone on to raise again (Beauhurst). So, well done on getting this far!

In this post, we aim to answer two questions:

1. When should I raise my next round?
2. How much should I raise?

When should I raise my next round?

The journey between investment rounds is about testing hypotheses. How efficiently you test those hypotheses, and how successful they are, will determine your burn rate and how quickly you acquire proof points.

The one thing we all know about a business plan is that reality will always be different; so what’s important is having a clear view of what you are testing, what it will cost, and what the metric of success is for each test. That way you can continually monitor your burn rate, expected cash out date, and the accumulation of proof points as you go. You can then adjust your fundraising plan to give you time to raise as you hit the proof points you want; or more commonly, before you run out of cash!

Time is in your favour during fundraising, until it’s not. So it is vital to allow plenty of buffer so that you don’t lose your negotiating power by running out of cash in the middle of a process.

Whilst for most VC’s a deal process probably takes up to 3 months from start to finish, I would allow at least double that. So start fundraising at least 6 months before you need to close. This will also give you time to manage the funnel of VC processes to give you the best shot of achieving competing term sheets at roughly the same time (creating all important FOMO!).

It’s usually helpful to keep conversations going between rounds. Not with all funds, but with a selection of funds who you had a good connection with and who seemed genuinely keen on the next round. In the vast majority (>75%) of our investments, we started the conversation at least one round before we invested, and in many cases two or three rounds earlier. This means the conversation has been going on for at least 18 months before we invest.

I’m not a huge fan of averages, as they mask the nuances of different business models and industries, but as a rough benchmark the median time between rounds is fairly consistently 18 months (Beauhurst).

In summary:

1. Monitor cash burn closely as you test hypotheses
2. Start raising at least 6 months before you run out of cash
3. Keep conversations going between rounds with VCs you like
4. As a crude benchmark, the median time between rounds is 18 months

How much should I raise?

The aim of a fundraise is either to get to break-even, at which point you are in control of your destiny, or more commonly to achieve enough new proof points to be able to raise more money, at a materially higher valuation than you can today.

Of course, taking external capital is about managing your own dilution whilst “growing the pie”. Raising and deploying capital is also a balance of buying time and increasing risk. When considering how much to raise, you need to think about the range of things you might be able to prove with different amounts of money, how much value each outcome would create, and some notion of the probability or risk of achieving those different outcomes. You can then decide whether you want to take the dilution of raising money, given the range of potential results.

You will have a long list of things you want to test and you won’t be able to test them all at once. So you need to prioritise and take a gated approach; as you hit certain milestone of successful tests and ideally revenue generation, you can unlock more tests.

Start by thinking about how long it would take to test everything you want to with your current team if you carefully tests around revenue milestones. Then think about how much faster you could test things with additional cost units, such as an extra product tribe, or sales pod. You can then build a picture of where different amounts of capital could get you and decide how much is right for you.

Fundraising requires your absolute focus. It will significantly distract you from the operations of the business for up to 6 months. If you plan to raise again, you should factor that in to how much you raise now. Raise enough to give you time to make material operational progress (>12 months) before having to start the 6 month fundraising process again.

It’s important that you demonstrate progress by the next raise so I would encourage you to raise at least 50% more than you think you need, to give you plenty of buffer to get there. It is always tough taking the hit on dilution, but from our seat having seen companies go through this time and time again, I truly believe you will be better off in the long-run by raising a bit more than you think you need. Your dilution will be less at the next big round if you have given yourself enough runway to ensure significant progress (allowing for hiccups).

By talking to investors between rounds you can calibrate your expectations of how much you can raise and what proof points you need as the business progresses. I encourage you to think carefully about how much capital you want to deploy and to iterate that with the investment community to arrive at the right answer for you.

As a rough guide, the median amount raised is £5m, £13m, and £21m at Series A,B and C respectively (Crunchbase), although at each round there are outliers that raise significantly more than the median . We are also seeing increasing prevalence of “bridge” or “extension” rounds where existing investors extend the runway of the company to increase the probability of success, and often the amount raised, at the next major round. The labels of “Series A, B and C” are relatively arbitrary and have different meanings to different investors. We tend to think of A,B and C as the second, third, and fourth institutional round, typically involving a new lead investor at each stage.

Average amounts raised by reported round stage UK 2017–2018 (Crunchbase)

In summary:

1. Think of your plan as a series of tests with a range of potential outcomes
2. Raising more allows you test more things at once and to prove stuff faster but comes with more risk and dilution
3. You need to decide how much risk and dilution you want to take now given the range of possible outcomes
4. Raise at least 50% more than you think you need to ensure you hit the minimum level of progress you are aiming for
5. Raise enough to give you time to make operational progress before you have to start the 6-month fundraising process again
6. Keep talking to investors between rounds to calibrate what you think you want with what the market is likely to give you

We hope this has been a helpful article. If you have any questions or thoughts please leave comments below to continue the conversation.

In the next post we will talk about navigating the VC landscape to understand who’s who and how to pick your VC. Please follow Smedvig Capital if you would like to hear more.

Data is taken from Beauhurst and Crunchbase