Optimal Capital Raise Amount

FEBRUARY 22ND, 2017

We have several portfolio companies in the midst of capital raises. Over the weekend, our discussion revolved around how much we think each should raise. The focus being on raising the optimal amount of capital; not too much or too little.

Raising capital is dilutive to existing shareholders; thus, it’s best to avoid raising more capital than necessary. A raise of approximately 18 months of cash is a good rule of thumb. Raising more than 18 months means you could be sitting on cash that you raised at a low valuation, although your company is now worth much more.

That said, raising capital is time consuming and distracts senior management from running the business. Raising less than 18 months of cash, means management will have to go through the fundraising process again in the near future, which could result in the business suffering operationally.

Calculating how much cash you need to operate for 18 months is easy. Simply calculate your current monthly cash burn rate (a Sources and Uses statement will help), and then extrapolate that burn rate out 18 months, adjusting for additional sources and uses of cash that come with growth. Alternatively, If your company is likely to achieve break-even sooner than 18 months, you’re better off raising exactly enough to get to break-even.

Your unique fundraising environment will dictate the structure of the round (i.e. if you’re desperate for cash, and there aren’t many investors, your valuation will suffer and you will give up a higher percentage of the company). If you’re the hot company on the block, with multiple competing investors, your valuation will be higher, and you’ll give up less of the company.

Additionally, it may be worth paying a premium to ensure you’re partnered with the right investors. If a particular investor adds value over and above their investment dollars (industry experience, customer contacts, strategic partnerships, increased acquisition likelihood), it may be advisable to allow them to invest even if they’re valuing the company lower than other investors.

The real key is to minimize dilution to existing shareholders (thus maximizing their value upon an exit event), while still raising enough cash to operate and grow the business without requiring additional, near-term, distracting capital raises. It’s a fine line to balance.