There was a very interesting post from Mark Suster earlier today on what is the right amount of capital for a start-up to raise? While “too much money too quickly can be destructive” at the other end trying to raise a small amount now and a larger round later can have its own share of problems:

“- the funding environment might change dramatically – there may never be a next round (see: March 2000, September 11, 2001 and September 2008)
- you may hit unexpected bumps in the road yourself making the next round tough
- there may be major competitive changes in the market that makes your next funding round hard (e.g. Google suddenly makes your product category free)
- you might do a great job in a great market but a competitor raises $3 million when you raised $500,000 and suddenly you have to compete with them”

And that brings us back to the same question – what, and in fact, when is the right amount to raise capital?

Scenario 1: Pre-seed.

Bootstrapping through family and friends cannot be recommended highly enough in the initial stages. Assuming that (a) the idea is on paper (b) the domain name is registered and (c) the website development work has been initiated, will lead to financing is being over-optimistic (I’m being polite). The concept needs to have developed traction or the product/solution reached at least a proof of concept stage for there to be some relevant interest from investors.

 

Two occurrences which have led to this article – the first was a question on one of the entrepreneur groups where I’m active and the second, an excellent article by Steve Blank.

The question was from someone looking at starting up and deliberating the approach to market sizing. His question was more to confirm his method, which was – ‘My target market is $10 billion. I am sure I can win at least 1% of this market. Hence, my revenues are going to be $60 million. In summary, I have a brilliant idea.’  Sounds absurd, doesn’t it? And yet, over 50% of the plans I see have the same approach in some form or the other.

The article by Steve Blank was excellent - a must-read for entrepreneurs.  A few firms that I have met come to me with detailed excel sheets (a dozen tabs at the minimum) including income statement, balance sheet, and cash flow forecasts for the next ten years – on a monthly basis. These are firms which would, in most cases, be at first customer discussion stage or perhaps rolling out a proof of concept. You can see the pride in their faces and imagine the effort that has gone into the preparation and you don’t have the heart to tell them - why in the world did you waste so much time and effort?

Don’t get me wrong. I am all for the preparation of financial statements and forecasts. And you can't possibly get away from the importance of the cash flow statement. But these should be statements and forecasts which help the thinking process of an early start-up, which help streamline its strategy.