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Conventional VC wisdom says entrepreneurs should raise 18 months of runway. This rule of thumb is directionally correct. But unfortunately, it’s not the whole answer, and it doesn’t provide full clarity into the exact figure for the last page of the pitch deck. Of course, this rule exists for a reason. And if you read the other VC blog advice available, they all essentially recommend a Goldilocks strategy for the dollar amount: not too much, not too little, but instead, just right. That seems pretty obvious, but what are the tactical steps to figure out what that actually number actually is? Here are seven things you can apply to your process to assist in finding the answer and raising the right amount:

1. Build a basic financial model.

Models can be built to predict anything, including up-and-to-the-right growth to show promise. But for this exercise, the purpose is to most accurately predict what the expenses are going to be over the next year and a half. It doesn’t need to be extremely granular with all the minutiae of your expenses, but since employees are most often the overwhelming cost-drivers — and there aren’t too many early on in a company’s life — it’s prudent to build the expense lines on an employee by employee basis. (Here are some very simple templates courtesy of Guy Kawasaki. Remember, the goal is to keep this exercise simple and not be too exhaustive.)

2. Adjust the model for real-world scenarios.

Once a simple model is built, take a step back and return to it a day later asking yourself: “Does it accurately reflect what’s really going to happen?” For example, employees aren’t going to start the day after the financing closes — it often takes three months or more to recruit additional core team members and get them up and going. Also, it will take at least three months to raise the next round of financing, whatever it is (Series A, seed extension, etc.). So fundraising time needs to be taken into account, as well as potential offsetting of expenses by revenue, though here, the most conservative of estimates is best.

3. Escape the time-based model vacuum.

I suspect that the 18-month rule originated because that’s the approximate average time it takes for startups to reach an important value-inflection milestone. Yet the next round of capital is going to be based on what was accomplished, certainly not by how much time elapsed. So depending on what that key milestone or milestones are, the timing of the model should be adjusted accordingly. (My partner Rob has a great piece on understanding and optimizing towards value inflection points at a seed-stage startup here.) For instance, are you anticipating that big, key customer in less than a year? Don’t raise as much. Does seasonality dictate parts or all of your business? Perhaps you really need 22 months of runway, not 18. Think of your seed capital as a way to empower you to reach that important milestone in order to raise the next round immediately after … not leave you just shy of the interim prize.

4. Add in an approximated fudge factor, but make sure it’s not too big.

Startups are hard. Not everything goes as planned. Things always take longer than anticipated. Whatever the “answer” is after step #3 above, add 10%-20% for a little more cushion for these “foreseeable unforeseen circumstances.” Others might suggest adding an even greater flex amount here, but in my experience, adding too much almost always translates to increased burn and less efficient (and more equity-wasting) use of capital.

5. Account for optics. They matter, for better or for worse.

Yes, optics do tend to matter, even for the seemingly little things unrelated to financials, product, traction, and team during your fundraise (like this). When raising a seed round, for example, if the figure is honing in on $1M, consider keeping it just under that amount, as then it could be positioned as a pre-seed to give you an opportunity to raise another seed round later on, if and when that becomes useful or necessary. Another example: Overly precise figures like $1.65M signals a lack of recognition that startups just aren’t that exact. Instead, round up to $1.7M. In short, for better or worse, you need to think about the number itself.

6. Take into account an honest reflection of fundraising ability.

There are numerous dimensions which can affect the capacity of an entrepreneur to fundraise: experience, amount of traction in the business to date, industry category, geography, accelerator involvement, etc. Fundraising is rarely easy, but it can be much less difficult for some than for others. If, even after running the above process, the resulting figure still seems “big,” then adjust down to be realistic about how large of a round can be raised now.

7. Build momentum.

The result of taking step #1 above and making all of the subsequent adjustments should be a range, not exact number. It’s almost always ideal to start with a slightly lower amount on the cover of your emails/pitch and walk up slightly in total round size due to a demand in potential investors, rather than worry about lack of demand and drop the number to ultimately raise less than your initial target.

To avoid perpetually fundraising, always be fundraising.

Although the process of determining the right fundraising amount for a seed round involves some Excel work, it’s certainly an art, not a science. The goal is to avoid eventually putting the company in a position where it then has to be drip-fed by existing and/or small new investors because not enough capital was raised initially. This constant state of fundraising can be draining on a founder/CEO and detrimental to the company. On the flip side, I think it’s important to keep prior interested investors posted on developments with brief updates … without having your hand out. Those efforts include gearing up Series A firms for when things take off. But equally beneficial can be to keep other seed players warm who almost got there initially. In today’s challenging Series A environment, startups might find six months post-seed that it’s better to refuel the tank with some additional seed dollars as a top-off rather than risk the end of the art of their original runway. Thus, to avoid a constant state of active fundraising, great entrepreneurs are always passively fundraising in some capacity. But ultimately, the entire process is made easier if you use the process above to land on the right initial amount. The post How Much Seed Capital Should You Actually Raise? appeared first on NextView Ventures.]]>