When thinking about how much seed capital to raise, we need a more sophisticated lens than just the old rule of thumb of “18 months of runway.” This is especially crucial given that the 18-month timeframe is a bit circular — a founder can always just take whatever amount she closes and divide by 18 to determine what her monthly burn rate should be. The true question, however, is if that level of spending will result in enough progress to successfully raise that next round of (hopefully) Series A capital.
So in reality, a milestone-driven, needs-based approach to determine the right amount to raise in a seed round is to build a financial model, adjusting for real-world scenarios and considerations, adding a fudge factor, and accounting for optics.
But before you get that far, there is one additional factor to consider to determine the right amount of seed capital to raise: an honest reflection of your fundraising ability.
There are numerous dimensions which can affect the capacity of an entrepreneur to fundraise, after all: experience, amount of traction in the business to date, industry category, geography, accelerator involvement, and so on. Fundraising is rarely easy, but it can be much less difficult for some than for others.
So how do you consider these many factors, in particular your ability to fundraise as a founder, into a headline “target” for your seed fundraise deck?
Let’s first consider a correlation between effort (on the x axis) resulting in more capital raised (y axis).
At first, fundraising goes slowly (…until it goes fast), as it takes a while to set the direction for prospects and to work through the kinks in the story and pitch. Those first few days and maybe weeks won’t yield much capital if any at all:
But soon, for any successful fundraising effort, the more effort you put into fundraising, the more results it will yield, in meetings and eventually in capital:
Spreading your network broader to pitch more potential investors will inevitably result in more capital being available:
So far, this is somewhat expected – if it’s a good team, product, and market, effort in means results out. However, this is where the model becomes so important. At some point, an entrepreneur begins to exhaust her network, and her network’s network, and the incremental hours devoted to fundraising will begin to yield less capital raised than the previous.
There begins to be diminishing returns to devoting more time to fundraising:
Eventually, a founder reaches a point where, given the state of the company, the team, and the traction to date (and all of the various factors), more time devoted to fundraising just isn’t worth it.
This means there is a theoretical “maximum” amount an entrepreneur can raise at any point in time in the seed stage. For some, it may be just a couple hundred thousand, for some, $1M or $2M, or for others, even more.
Here’s the biggest takeaway in this exercise:
DON’T GET TO THAT POINT.
That point of diminishing returns is NOT actually the magic number you want to raise. Instead, your magic fundraising number is actually the one which corresponds to approximately 80% of effort devoted to reach that highest point. Right when the curve begins to bend and fundraising begins to feel increasingly difficult is the moment where you’re better off ending your fundraising process and devoting the entirety of your attention to building the business.
At this point, a CEO’s energy should be focused on efforts which will increase the ability to raise capital in the future, which is now best done through accomplishing key business milestones rather than more legwork on an existing fundraise.
Of course, it’s impossible to know before embarking on a fundraising process — seed or otherwise — what that exact, optimal fundraising target should be. But the above heuristic does force you to ask the right questions. The point is not to ask, “What’s the most seed capital I can raise?” but rather to ask, “What’s the most amount of seed capital I can raise without increasing difficulty?”
The answer to that question provides the most useful data point to then answer the real question: “How much seed capital should I try to raise?”
The goal of fundraising shouldn’t be about maximizing dollars raised but rather optimizing the balance between effort and amount.