One of the first things I do when I engage with a new one of my "Sherpa" companies is talk about raising their seed financing. As part of this discussion, a number of important questions arise, one of which is "How much should I raise?".
This question is sometimes asked as "how much 'runway' do I need?", that is, how many months of burn rate do I need to have before I run out of money. The question, however, is better framed as: "What do I need to look like (i.e., have accomplished) when I go out for my next round?". This question is, in some ways, harder to answer nowadays, because the VC industry is much lumpier, or more stratified, than it was when I grew up in it, with different kinds of VCs only (or mainly) interested in deals of a certain size and in companies that have a certain amount of business traction. Because of this, as startups plan their Series A financings (first institutional VC rounds) it's more important than ever to understand what kinds of risks each type of VC is comfortable with financing.
More on this in a subsequent post.
What this post is intended to do is remind entrepreneurs (and their advisors) of a very important, but easily forgotten, fact: you will need 3-4 months to raise your Series A financing (and, maybe, more). In deciding how much money to raise in their seed round, startups need to include this additional 3-4 months into their "how much runway will I need" calculation. Based on my experience interviewing and advising entrepreneurs, it's a very easy fact to forget.
Here's the simple takeaway: entrepreneurs, make sure you raise enough money in your seed round to accomplish what you need for your Series A (first institutional VC) round 3-4 months BEFORE you run out of money. Otherwise, it may be too late.