At Entrepreneur First (EF) I’ve been the first investor in 100 startups that raised seed rounds, and almost as many that didn’t.
The most common question founders ask at the start is “how much money should I raise?”. And even good founders get the answer wrong.
At Seed, the answer begins with your Minimal Viable Raise.
Minimum Viable Raise
Your Minimal Viable Raise (MVR) is the smallest amount of money that can get you to Series A metrics in 18 months.
Start with the milestones you need to raise a Series A. Work backwards from those milestones to an 18 month plan, and aggressively cut costs until you reach a number that feels too small. That’s your MVR.
If you’re scared, your MVR is probably right. The test is: if you were offered 10% less, could you revise your plan and still hit Series A metrics? Yes? Not your MVR.
Often, founders try to raise more by asking for more. But, however much you want to raise, your MVR is how much you should tell investors you’re raising.
Your MVR gives you the best chance of raising just enough to make it. But it also gives you the best chance of raising way more.
Easier up than down
Empirically, it’s much easier to increase your round size later than to decrease it. On average, if they raise, EF companies raise 1.5x more than they initially ask for. Some have raised as much as 5x their MVR ask.
If you ask for more money than investors offer you, you’re in trouble. If you said you needed $1m to get to Series A, but you only end up with $500k in offers, the plan to Series A you convinced investors with has to be scrapped. You’ll have to convince the investors you convinced before that you can get to the same point with less money, and now they’ll be wondering why you couldn’t convince anyone else first time around.
But if you get offered as much as you ask for, your options often explode.
Why you’ll get more than your MVR
Once you have an offer you might accept — your MVR or better- fundraising will often swing in your favour.
And your MVR drives the two most important factors for getting acceptable offers: who’s investing; and competition.
Generally, investors with big funds need to invest more money per company. Even if your MVR is too small for them, they know they can persuade you to raise more than you’re asking for. After all, if you can do enough with a little, you can do a lot with a lot.
Generally, investors with smaller funds will be put off if you ask for a lot because they can’t fill your round or offer proportional valuations. But, if your small round becomes bigger because you’ve been offered more, it’s a such a good sign that you can often persuade them to stay in.
And, since the percentage equity investors take stays roughly constant no matter your round size, your round size implies your valuation. Any investor who might invest at a valuation you’d accept, would invest at your MVR valuation. This is your most competitive possible price.
So, asking for more than your MVR often eliminates investors who might give you an acceptable offer. And the more investors who might give you an acceptable offer, the more ways your round can become competitive.
Having an acceptable offer is the strongest external signal to other investors that you might succeed. And so few startups succeed that investors must compete if they think you might. Competition is extremely powerful.
If your round becomes competitive, investors will compete by increasing their offer or improving their terms. Your original ask and valuation become irrelevant. Often, you can squeeze everyone in by increasing the round size while improving your valuation and terms.
You can do this because investors can’t afford not to invest your company if they think it’s great, but also can’t afford to dilute you too much by investing at a disproportionate valuation. If you raise double what you ask for, investors won’t dilute you twice as much because they need you to stay incentivised later on.
Paradoxically, starting with your MVR can make raising a bigger round easier than trying to raise a bigger round from the start.
Less is more
Start with your MVR. If you can’t raise your MVR, you can’t raise more. If you can raise your MVR, often you’ll raise more or raise on better terms. Even if you only raise your MVR, you’re still better off: if you ask for more and have to backtrack you might not raise at all.
The exception to MVR is when raising astronomical amounts is your startup’s competitive advantage. But if it is, you’re not reading this post on how to fundraise.
So, how much money should you raise? Start with your MVR.