Why Raising Too Much Money May Not Be Good for Your Startup

The success of any startup largely depends on how much funds have been raised, invested, and judiciously utilized. However, the real question is how much funds should be raised at the start. If you are establishing a startup for the first time, there’s every possibility of being tempted to fundraising in a big way at the seed stage itself. The allure may be strong but can eventually prove deadly for your startup.

The best way to begin your startup is through self-funding or bootstrapping by pooling in your savings, and borrowing from family and friends at cheaper rates. Your startup will get running with little investment initially. Raising seed capital from family, mentors, friends, and seeking loans in exchange for common stock is yet another way to fund your startup during the preliminary stage. Most startups, however, depend on venture capital funding, which may, later on, result in multiple rounds of funding depending on the viability and potential success. Before going in for venture capital fundraising as a startup founder, you should first assess your requirements and ask yourself how much fund is to be raised.

Be realistic with your expectations

You need to make solid financial projections for your startup and be realistic with your expectations. Being optimistic and positive about the expected revenue is good, but it should be based on provable facts. You should approach potential investors with well documented financial projections when seeking funds for your startup. You need to present the figures that your business can generate. False projections will put you in difficulty. Being a realistic optimist will work wonders for your startup and give it a solid reason to forecast its success. 

Adopt a conservative approach towards fundraising

Most startups start their journey with unassumingly great investor confidence and high hopes. However, many startups often capitulate within the first year due to several reasons. When it comes to fundraising, you need to tread cautiously, and with a conservative approach. 

Overpromising the investors with what your startup just can’t fulfill is sure to backfire. Presenting a rosy picture to investors just for the sake of fundraising will do you no good. You need to raise funds conservatively and then grow. 

Do remember that achieving or exceeding the objectives of your startup will solely depend on making the right investments and the hard work your team puts in. And, it’s possible only when you know how much funds are needed to make the startup fulfill your and investors’ expectations. Conservative fundraising is pragmatic and will put you in good stead.

Raising too much money leads to excess expenditure and wrong judgment

No matter whether you raise $2 million or $6 million in the same timeframes, the raised amount will be spent anyway. More capital means spending more liberally. You may go overboard and spend unnecessarily on hiring more staff than needed – PR firms, promotional events, etc. However, it should be the other way round. 

You should first create a budget for your startup and spend only 70% of the raised amount in a period of two years or so. You will gradually realize how your startup’s prospects have been harmed by overspending and undervaluing it for other rounds of funding. This must be avoided at all costs to ensure your startup’s success.

Company valuation is harmed due to overfunding

Many VCs want a strong return, which may be 10 to 30 times their investment. The success of your company will depend on the money you have raised and achieved its goals. Just think what it would be like if your pre-money valuation of the company is much higher than it should have been. Such a price range won’t be supported by the market. You won’t be able to pay back to the investors at a multiple of what was raised initially. Your company will run a high risk of being undervalued. You won’t be able to raise funds in other rounds. You should first raise a modest amount, grow your company, and then set a high post-money valuation for your company to get bigger returns.

Unavoidable conflict of interest between startup founders and investors

Investors always think of getting high returns. Profits usually are the number one priority for them. They will try to influence you in decision making, which you may not like. Don’t land in such a situation where there is a conflict of interest between you and the investors. You should rather make efforts to make your startup sustainable and boost investor confidence. Focusing on capital efficiency and raising the right amount of money will avoid such unpleasant situations.

Exit options will be hurt

Every investor wants a lucrative exit option. However, when a startup goes into overdrive by raising too much capital through aggressive fundraising in the early-stage, the exit options for investors are surely hurt. For example, if you raised $20 million in Series A funding at a $30 million pre-money valuation, it will lead to a post-money valuation of $40 million. 

A 10-fold increase in value will be expected by early-stage VCs. They will be looking for an exit valuation of $400 million. This excludes additional investors joining the later funding rounds. Exiting under $150 million will be impossible with many investors in the fray. This will severely undermine your startup’s valuation. VCs may resort to exercising their discretionary power of veto rights to legally prevent an acquisition if the offer price is abysmally low. This will hurt exit options.

Bottom line

There are lessons to be learned when it comes to raising money for your startup. There are multiple hazards if you are unrealistic and aggressive in your fundraising drive in the early stage. The reasons are many and already stated. Your success story depends on being realistic and having your objectives clearly defined. Don’t expect too much too early. Wait for the right time and the appropriate valuation of your company. Being pragmatic in fundraising is the mantra of success of your startup.

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