VC Question: How much are you raising?
Subscribe to the Youtube channel here:
What they mean
How much you are raising is one of the most common and basic questions that every investor will ask you, even if they are not that interested. This is such a relevant question because it dictates whether or not the investor can even invest in you at all.
You have the potential to look pretty stupid if you are pitching a seed stage investor who normally invests $500,000 and ask them to invest in your $20 million Series B round. This shows that you did not do any preparation to understand the investor; I’m surprised that you got a meeting in the first place!
But let’s say you are looking to raise $1.5 million and the investor normally only invests $500,000. They now need to think if they have the capital or dry powder to be able to participate in this round. If they are normally a lead investor than their $500,000 may not make them a strong lead, so they may end up having to be a follower instead, which may not suit their business model and brand.
Once you answer this question, everything else can be linked back to it in some regards, so it acts like an anchor. The next question, of course, will be, if you are raising $1.5m, how are you going to spend the money. Your marketing plans, who you want to hire etc are all linked to this very important number.
So fundamentally this question serves to see if you have done the most basic of preparation and gives food for thought for the investor as a basic filter.
What you need to say
You need to have given this some serious thoughts. The amount you raise at this round needs to be just enough to get you to your next round of funding, or even profitability (Especially if you are in Africa!). A VC-funded startup is a game of pass the parcel. Each round you raise large amounts from different investors, and the previous investor only cares about you living long enough for the next investor to buy into you.
“This is a great question, let me tell you how we thought about this. We want to have a runway of 18 months so that we have 12 months to execute with our heads down and six months to raise with some buffer.
We are doing $100,000 MRR at present and the revenue milestone investors expect at series B is $300,000 MRR.
According to our hiring and marketing plan, with our assumptions on CAC and customer retention, we need $2.5m for hiring and $3m for marketing. G&A should be around $1m on that hiring plan.
Adding a buffer of $1m, our base plan is $7.5m. We have developed scenarios for a downside and upside case.
We think we have a strong product market fit so we can comfortably raise $12 million and spend it properly with a good RoI. We are feeling out the markets with investors to understand what their appetite is and the kind of aggression they would like to commit to. We would love your thoughts?”
Get in the game
Free tools and resources like this shipped to you as they happen.