I was sitting with an entrepreneur last week as a part of a mentoring office hours program that I participate in. He wanted advice on raising a seed round. He was very clear on one point. He wanted to raise $1.5 million in this round.
So I asked the obvious question.
What do you plan to use the $1.5 million for? A vague response followed.
I see this all of the time.
Here’s the thing.
In your early fundraising rounds, it’s important to remember that you are fundraising so that can reach a critical milestones that will enable you to raise again in the next 18-24 months.
I talk to a lot of entrepreneurs that look at their angel, seed or Series A as a discrete process and accomplishment. That’s a mistake. The fundraise isn’t the accomplishment. It’s simply a way to fund the work that you need to do to keep proving out your idea.
When you are thinking about your raise, you have to be thinking about what you need to achieve between the close of this round and the start of the next round. This has to be a part of your raise pitch, and more importantly, your plan for how to invest that new influx of dollars has to be focused on delivering on the metrics you need to drive your next round of funding.
So when I asked how the $1.5 million was going to be used, I was hoping for an answer that sounded something like this:
“I have a prototype of a product I’ve been testing with some users. I have some good early feedback. I think I’m on the right track. I’m raising the seed round to build a real MVP and then invest in some marketing to really prove out product-market fit. If I’m going to raise an A round in 18-24 months, I need to demonstrate that people like the product and that I have a model that can scale. I have 3 key metrics I’m focused on specific to engagement, and we’ll be running a series of tests to make sure we get this right.
We’ll hire 3 developers and one person focused on go-to-market strategies. The marketing hire will be fairly junior, and will mostly focus on digital acquisition for now. The $1.5 million represents more than 24 months of runway, and our goal is to have proven product-market fit within the next 18 months so that we can kick off our Series A with plenty of cash in the bank.”
That’s the right way to think about your fundraise.
Remember, each successive round gets harder to raise. You need a plan to get from this round to the next, and you need to be incredibly focused on proving out the metrics that will drive investor interest and valuation.
Because hitting that next round without having focused your efforts in the right places leads to a pretty depressing result.