Every conversation with an investor will ultimately lead to their question: “So, how much money do you need?”
The worst thing you can do is try to come up with a number out of thin air - €1 million, €5 million, €10 million, etc.
This “thin air” approach gets problematic the moment the next question from the investor comes in: “Great! So what are you going to spend this amount on and where would it get you in terms of results?”
If you don’t have a clear idea you start thinking out loud. VCs feel the hesitation and lack of proper financial sense and very quickly reject your company.
I don’t want you to get rejected, I want you to win.
So let me walk you through the exact simple process which you can use to define your round.
The proper way to determine how much money to raise
I’m going to be direct here:
There is ONLY ONE WAY to adequately determine how much money to raise. And it is to base that number on your actual goals, needs and projected spending.
Let’s do it together in three simple steps.
Step 1. Define your goals & milestones for the next 18-24 months
It all starts here - where do you want to be in 18-24 months to raise your next round?
If you're raising pre-seed now, the next check comes from a seed fund. If you're raising seed, it's a Series A fund. Know which fund you're selling to next, and you know your bar.
Notice that it’s not 6 months or 48 months ahead. 18-24 months is a timeframe most VCs feel comfortable with. Short enough to allow for some predictability and long enough to hit the milestones that set up your next round, without getting stuck in permanent fundraising mode.
There are 3 main company aspects you have to define your goals for:
1. Revenue - e.g., reach $50K MRR; hit $1M ARR; achieve 15% month-over-month growth; close 3 enterprise contracts worth $100K+ each; or move from free-only to a paid tier generating real revenue.
2. Product - e.g., launch v2 with core feature X; ship a mobile app; build an API/integrations layer; achieve 99.9% uptime; reduce onboarding time from 30 minutes to 5; or complete SOC 2 compliance to open up enterprise sales.
3. Market - e.g., launch in 3 new markets; expand into a second vertical or geography; grow from SMB into mid-market; acquire 10,000 users; reach 500 paying customers.
Open up a notebook, a Google Doc or a spreadsheet and jot down your business goals for each of the 3 aspects above. Be as specific as possible - where do you want to be in terms of Revenue, Product and Market in 18-24 months.
If you want to take it up a notch the above goals themselves have to correspond to the metrics that next-stage investors want to see.
Because VCs fund you so you can hit the milestones that set up your next round. This is how you grow faster. And that's how they make their return.
I’ll be covering round-specific benchmarks for startup metrics in a future article, but if you feel curious about metrics benchmarks, start by reading this.
When you’re ready here, move to step 2.
Step 2. Estimate what hitting those goals will cost
You already know your goals and milestones. Now let’s look at what your costs will be in order to achieve these.
If it’s your first time calculating your costs and spreadsheets are not your strength, do not overcomplicate it. You should be able to do these calculations on a napkin (in the ideal situation these costs go into your financial model, but more on that in a later edition).
Think about the following buckets of costs:
Team
How many people do you have to hire and when? What would their salaries be?Engineers, business developers, marketers, designers, etc. - all of these go here.
How much money do you potentially need for a team?
Sales and Marketing
Do you plan to run any ads, organize or sponsor events, contract an external lead gen agency?
Any costs related to marketing and selling your products (besides team members) go here, even the tools you use.
Product & R&D
Do you need any developer tools (Cursor, CodeRabbit, Sentry) or infrastructure (AWS, Azure, Supabase)?
How much would these cost?
General & Admin
Do you need an office space, lawyers, accountants, insurance? Do you plan to travel?
How much money do you potentially need here?
You could approach the costs write-up either monthly and then extrapolate them to reach the yearly costs or straight-up yearly. Whatever feels easier to you.
By the end of this step you already know what your goals and milestones are for 18-24 months and you roughly know how much money you need in order to get there.
And now the final step.
Step 3. Add a contingency buffer
By now, you should have a number which represents your costs for 18-24 months.
But this number represents only the costs which you can predict. This is why the final step is to add a buffer of 15-20% which could account for any unforeseen expenses and give you more peace of mind.
And voilà! This is the amount you fundraise.
Final thoughts.
Keep in mind that the above exercise we went through is an ultra simplified way to help you define your round size. In the best case, preferred by all investors, you have to build your financial model (even a simple one), which takes into account your business model, revenues, costs and all kinds of additional company-specific assumptions.
The one thing to remember is to never base the amount you’re raising on random numbers. Always start from the perspective “What do we want to achieve?”, “How do we achieve that?” and “How much money does this cost us?”.
That’s all for this week.
See you again on a Thursday soon.
