This is a much-debated question among founders, as well as with investors.
In our bubble era, many entrepreneurs tend to answer “as much as possible”.
Yet, very few succeed in raising the amounts they originally targeted. The media largely echo those rare birds, which adds to the confusion.
Raising a seed round to establish a prototype of your solution does not require the same amount of money as rolling out a successful product in several international markets.
Make sure you know how venture-backed companies are financed: seed, series A, series, B, etc. just follow the development stages of startups, from inception to proof of concept, proof of market, etc.
Don’t ask for several million dollars when you barely have a team. Funding will be gradual, as you test your business idea in the real world.
This is the real question you should ask yourself, before you meet with business angels or venture capitalists.
The first step consists in establishing your short to medium-term operational goal.
You will most likely not take the world by storm with a brand-new product everybody needed but nobody had thought of.
At least, not overnight.
You should therefore articulate a clear objective, and show what resources are required to get there: new hires, marketing spend, certification, building an acceptation or indirect distribution network, and the like.
Once you have an objective in sight, and you identified the resources needed to reach it, the question becomes: how long will it take to take there?
Theoretically, the monthly cash burn times the number of months gives you the size of your fund raise.
But things won’t go as planned.
They just won’t.
It will take longer than anticipated to set up meetings with partners, to recruit new team members, to find and lease new offices. That’s just the nature of startup life.
So add a buffer to the amount you raise.
20% is a well-accepted number among financial investors. The last thing you want is to run ouf of cash when there are only a couple of months left to reach that value-creation milestone.
You also need to plan in advance for your next fundraising effort, as it takes at least 4 to 6 months to complete a VC round, at best. You don’t want to continuously be on the road talking to investors, as opposed to focusing on developing the startup.
Experience shows that the approach described here has several advantages.
Firstly, it forces startup founders to ask the hard questions around what they really need to do, to achieve value creation.
Secondly, it sends a message to potential VC investors that you are a strong and focused team. This alone will set you apart from the hundred of investment opportunities they receive every year.
Finally, if you believe in your startup, you will raise only what you need to reach that milestone. No need to dilute your ownership too early: you will get a better valuation in the next round, 12-18 months down the road.