How Much Cash Should You Raise?

I see a lot of founders actually do this backwards (I’ll explain below) and with VCs starting to call capital from their LPs at increasing rates again, I wanted to set the record straight by sharing my formula for how to determine your round size.

This comes from my Set the Right Valuation course, which covers the 5-step framework in full and includes exercises to help you determine your round size, valuation, and more.

Today’s newsletter covers a small piece of it but to get the full framework then check out the course.

How Much Cash Should You Raise?

Set Your Milestones

Last week’s post covered how to set the right milestones for your raise. You won’t be able to determine how much cash you need if you don’t first understand what you’re going to spend it to accomplish.

You can read the full post if you want to go deeper on how your milestones impact everything, including your valuation, but to briefly recap what’s relevant for your round size you should have the answer one question:

What do we need to accomplish with the money to be able to raise another round later on?

Once you’re on the venture path you’re almost certainly going to need to raise again in the future in order to have a shot at growing your company enough to fulfill the promise of venture-scale returns you made to your initial investors.

As a result you need to work backwards from the next round to determine what size this current one should be.

Also if you’re raising without a clear idea of what you’re going to do with the funds investors will look at you like a riskier investment than they’d like to.

Use The Round Size Formula

Once you have your milestones you can easily back into your round size by considering three factors:

• Expected total burn

• Expected burn rate

• Cash in the bank

And the formula you use these for is:

Round Size = Expected total burn + (expected burn rate * 12) - cash in the bank

Let’s break this down.

Expected Total Burn

It’s a fact that most venture-backed startups will lose money in the early days. While this isn’t a universal truth, and it’s riskier to be aggressive with capital when capital is scarce like it was in 2023, it’s the nature of the game you’re playing if you’ve chosen to raise for the right reasons.

If the market opportunity you’re going after will either be captured by competitors or close after a short period of time, your choice is to move fast to grab it yourself or die. Moving fast tends to mean being comfortable losing money and having conviction you’ll be able to raise more if you hit your milestones.

You’re already all-in. Be frugal but aggressive with your capital. The right vibe is something like booking cheap hotels if you need to travel but investing in assembling the right team, building your product, and funding growth experiments.

Use this mindset to predict your expected total burn, I recommend setting up a Google Sheet to create optimistic and pessimistic predictions for revenue and expenses for as many months as you expect it to take to hit your milestones, assuming you successfully raise now (I include my own template for this as a workbook in the course). I recommend at least planning for 18 months.

Be honest with yourself, don’t inflate your expected growth or undercount expenses. If you do you’ll pay for it later when you have less time or need more money than you planned.

On that rough P&L look at how much you’ve burned in total across all of the months. That’s your total expected burn.

Expected Burn Rate * 12

Also look at how much you’re burning per month, on average, at the time you’ll reach the milestones. Consider a 3-month average, or 6-month if your burn fluctuates a lot.

Now multiply that by 12, that’s the middle part of the formula.

Investors will trust you much more if they believe you’ll be a good steward of capital and take precautions to protect the company.

While I’ve seen many rounds get done when the company has only a couple months or even weeks of runway left, you don’t want to put yourself in a position where you’ll naturally appear desperate. Investors can smell this a mile away and it will significantly hurt your chances of raising.

No matter what you say to justify it, it reflects poorly on you. Investors will wonder whether you weren’t very good at finding your ICP, building the product, or just were reckless with capital.

As a result I highly recommend going out to raise when investors won’t question whether you’re only doing it because you need to, have at least 12 months of runway.

So when you go out to raise next time you’ll be able to say “we’re burning an average of $xx,xxx per month and have 12+ months of runway.”

This will instantly de-risk the deal to a degree in an investor’s eyes.

Cash In The Bank

The last part of the formula is just taking into account how much you have in the bank now.

If you have money already, you’ll need to raise less to hit your milestones than you otherwise would.

A Simple Example

Let’s say you believe you’ll need to burn $2 million to hit your milestones and raise you next round.

At that point you think you’ll be burning $50,000/mo, and you’re starting out with roughly $90,000 in the bank from an angel who believed in you early on that you haven’t spent much of yet.

Your calculation would look like this:

$2,000,000 + ($50,000 × 12) - $90,000 = $2,510,000

So your plan would be to go out and raise $2.5 million, though if your team or early traction are great I’d push it to $3 million, startups always take longer and are more expensive than you expect. The extra cushion is worth the additional dilution.