how much, how often and why

Posted by in Investing, Opinions

There are two reasonably well rehearsed points of view that I find somewhat frustrating when it comes to advice on raising capital, firstly the ‘get as much as you can’ ethos and secondly the ‘take as little as you can’ ethos.

The get as much as you can ethos is flawed in so far as I can only really see two outcomes when it is fully applied.

The most likely outcome is that the business will receive investment and will spend what it has. A bit like monthly salary, you generally spend everything you have. Raising ‘as much as you can’ at any point in time kind of separates the fundraising from the goals and encourages over spend. In the past I saw two (lets keep them anonymous) SaaS competitors operating in the same vertical – one received under £500k of initial investment and one >£millions. They both grew to roughly the same size over the same time period and the former was, arguably, more successful. The business that raised the least was more efficient and the lower capital encouraged financial and process rigours that bore dividends as the business grew.

The other outcome is that the business doesn’t actually need the capital and has raised too much when the valuation of the company is low. Cue a disappointed entrepreneur staring at unutilised capital investment on the balance sheet that cost him a % of the company he didn’t need to give away.

As such ‘raising as much as you can’ is not good advice in my book.

Similarly taking as little as possible is also inefficient. If you raise too little you end up in too many either/or cash discussions and inevitably compromise on critical priorities. Moreover it risks getting you into one of two disadvantageous situations. Firstly the precipitous fundraise where if you don’t raise more capital then things will go badly wrong for you. You can never maximise value for investment unless you are definitively the party at the table that can walk away and say ‘no thanks very much’. Secondly you risk getting distracted by multiple time consumptive fundraising rounds when effort would be better spent on growing the inherent value of the company itself.

I therefore don’t like the ‘as little as possible’ argument.

So where do I land. I kind of fall into the camp that says you want to raise enough capital to comfortably get you to your next significant milestone and some…..

Clearly define a utilisation of capital (e.g. continuing the analogy above, raising debt to buy a car when income isn’t sufficient) that delivers a significantly value accretive step-change for the company. Then factor in a good runway thereafter to have time for both slippage and to raise further capital to avoid the precipitous raise.

The advantage to this is that you are constantly building value as you raise subsequent rounds and leaving time to both be the guy that can say ‘no thanks’ and also for the inevitable slippage and screw-up factor. It also reduces dilution as you are always pinning fundraises to signicifant step-change events.

I tend to get nervous when fundraises don’t give businesses at least 12-18 months of leeway in worst case scenarios and when the fundraise is expressed as areas of expenditure rather than as a means to achieving a goal. What I mean by this is when the argument is solely ‘it’s to recruit X, Y, Z and expend in marketing etc….’ compared to the better ‘it is to achieve this significant step change in the company which involves us recruiting X, Y, Z and …………’…… you get the gist.

My opinion may sound pretty subjective and difficult to qunatify. And as an abstract concept in a blog it certainly is. However when deployed in real life the scenario I advocate is normally indicative of an entrepreneur with a clear plan, a strategy and good cash control. You know it when you see it.