“You’re not raising enough money.”It’s common to hear this from from VCs after a pitch. But is it true? Sometimes, but not always. For purposes of creating a hypothetical scenario for this post, let's say you’re asking for $500,000. You think that’s realistic, and enough to keep you going for 12-18 months. You believe you can make real progress and go back to the market to raise more if needed at that point, on a higher valuation. Perhaps you might even reach profitability (you think, but probably not because this usually takes longer than you might think). The typical VC might disagree with your approach, recommending that you seek $3M right now because "well, you're going to need it." So what should you do? Consider that the VC may be saying this to you based on their own motivations, and not what's in your best interests. And remember that any business deal is about momentum. Asking for less and then raising more = positive momentum. Conversely, asking for more and then raising less = negative momentum. The VC may be interested in what you're doing and just positioning to get a certain amount of ownership in your company. That's great! But only if they actually do the deal! Otherwise this "raise more money" advice can kill your chances at actually raising the smaller ($500k) angel round when the VC disappears. That's because negative momentum will creep in and your public attempt to raise $3M will look like failure to your potential investors, even if you have $1M in commitments. Some of them may start to feel uncomfortable and end up not investing. It's about the momentum. If you think you can make good progress on 500k, then that may be the best place to start. Of course it would be great to raise more, but if you go around saying you need a lot more money, you could harm your chances of raising an angel round. Let the market push the amount up, creating positive momentum. In situations with positive momentum, the valuation can increase with the amount of capital committed because the deal is gaining momentum rather than losing it. Above all, be transparent. Make sure the VCs understand that in the absence of a term sheet, your ask will be 500k because you have a plan and know that you can make meaningful progress given that initial raise. At the same time, clearly communicate that you would love to consider raising more if they're game to explore it. Basically, put it in their court to deliver a term sheet and signal flexibility in this situation. Don't let the "VC push to raise more money" ruin your chances at a reasonable angel round because you over-ask and then can't get there.
The VC Push to Raise More Money
December 29, 2012 By