There is something about being scrappy, and hopefully as a founder, once scrappy, always scrappy. I have seen too many decks and have had too many calls where founders tell me that for their seed round they are raising $1.5-2m and of course with that, they believe their valuation to be something that seems out of range considering that this money is getting them to actually prove the model.
I believe that nothing is standard as long as you have legal documents to back you up but there are some realities to how much should be raised at the beginning of a company. First round, after some friends and family, should be in the range of $500-750k, next round should be in the range of $1-1.5m, next round $2-3m and then things can really bust out after that. Each of these rounds gives you the ability to grow and be smart. Too much capital in a business isn’t always a good thing.
Building a business takes discipline. How many engineers do you need, how many sales people do you need, how much is the rent, how big is the marketing budget, what is the cost to acquire customers, does PR make sense and when, is it time to bring on someone to run HR, and so forth. Each time you raise money, it is important to get back to the drawing table about costs.
I have seen companies take on more money than they needed because someone was willing to give it to them at the valuation they wanted too. Each time, fiscal responsibility blew out the door. These companies either failed or found themselves in down rounds because they needed more cash and they had not built the value with cash that they had.
It is becoming easier every day to build a company from scratch with less capital. Be smart, be scrappy and if you can, stay that way forever by being disciplined about cash.
I think it was RRE Ventires that did a study which said optimum seed round was 900k to 1.2mm. The probability of raising Series A didn’t go up with more cash over 1.2mm.Guess that forces discipline which reinforces your point!
Truly appreciate this great nugget of absolute truth ! ” First round, after some friends and family, should be in the range of $500-750k, next round should be in the range of $1-1.5m, next round $2-3m and then things can really bust out after that. Each of these rounds gives you the ability to grow and be smart. “