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What they mean
This is not a common question in my opinion. I throw these in to make sure you are thinking about the right things and understand how investors are thinking.
At a simple level, they sort of wonder if you actually have a funding plan. If you raise a lot of money then you need to back it up with a big vision and plan. Is that what you are down for? Yes, ok cool.
To be clear raising money is bullshit. It is not a TechCrunch honor badge. Don’t raise if you don’t need to. If you want me to explain why ask.
The investor is considering how much dilution they are going to have before exit, but they’re also thinking how to allocate dry powder if they want to participate in future rounds. Investors have targeted ownership percentages in the company that they investing in.
If you are ‘capital inefficient’ and need to raise a tonne to build a big company, this might not work for them.
Since most startups fail, they have to have a large enough position in the successful companies to make their business model work. If you have raised $10 million dollars to date and you plan on raising $70 million in total, that is an additional $60 million across maybe 3 rounds. They will have to do the math to figure out how much they will need to commit to maintain their targeted position.
This question also is a test to see whether the founders have considered their execution strategy and the type of business and scale that they want to build. If you say that you want to raise $5 million more and you have only just done a seed round then they might wonder if they have found the least capital-intensive business in the world or the most naive founders.
They are not saying raising is cool. Investors care about themselves. They need you to win to make money. And they need to own lots of you to make a return.
Depending on your model, maybe they are wondering how capital efficient your business model is.
What you need to say
“We are an enterprise SaaS startup. Historically it takes seven years and $70 million to get to IPO. We are quite similar to Box in some regards given our customer focus and product complexity. According to CrunchBase, they’ve raised $85 million, so that is probably a good benchmark for us. Assuming we follow their trajectory, it probably makes sense. Times have changed a bit since they started, so we expect to be able to grow faster due to the number of smart phones available. A lot needs to happen in the future so we are focused on today and the next year, but we have an eye on the future. ”
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