In a previous article, I described various ways to determine how much money to raise (you can read it here). If you’ve decided and communicated how much you are raising, you might be getting the obvious follow-up question: “Why is that the right amount?” It’s a very simple and justifiable question for the investor to ask but it is commonly met with a host of unacceptable responses, such as these:
- It lets us continue to operate for 9 months
- It allows us to hire a lead architect and two sales reps
- It lets us start doing some marketing
- It lets us move into a larger office to support our expected employee growth
- That amount will only cause us to give up 25% equity in the company, which feels right for this early phase
- It’s the most we think we’ll be able to raise given our current traction
- We’ve seen a lot of other startups in a similar stage raise that amount of money successfully
- We have an advisor that told us that was the right amount for now
So What, Why Do I Care?
I could add several more but you get the idea. To every one of these answers, my response is “So what, why do I care?” (see related article titled The “So What” Rule) What investors want to know is the resulting strategic milestones and outcomes the funding allows you to reach that help secure viability (elimination of risks, increased traction, important validated learning, etc), keep you on your path to achieving the stated vision and eventually reaching an exit event that will give the investor a significant return on their investment. If staying on that path over the next 9 months requires a lead architect, an inside sales rep and some marketing activities, that’s great. But don’t put the cart before the horse. Your answers to “so what, why do I care” should become your explanations for why a specific amount of money is the right amount to raise.
By the way, you might have to ask yourself the “so what” question multiple times in succession to get to the real answer. Here’s an example:
- “It allows us to hire a lead architect”
- answered by “so what, why do I care?”
- “Because that allows us to implement a true multi-tenant SaaS architecture for the V2.0 of our product, expected to be released in 9 months”
- answered by “so what, why do I care?”
- “Because that will reduce our average hosting cost per customer by 40%, improve our gross margins from 60% to 90% and improve our CAC Payback from 13 months to 7 months. We get to sustainable profitability six months quicker this way.”
- BINGO! The real answer for the investor is the funding gets you to profitability in June of next year, which is six months faster than without the funding.
This is just an example and getting to profitability might not be something you’re even trying to reach at this stage. You’ll rarely get scrutinized if your new funds will be used to acquire a bunch of customers. Just don’t fall into the trap of conveying some nice round number for convenience (see related article titled “When is Achieving a Certain Number of Customers a Meaningful Milestone?”) and be prepared to back the goal up with the ways you will go about doing that. The reply to the magic question might be something like “We will use the money to acquire our next 350 paying customers, which brings $45,000 in new monthly recurring revenue and gets us to cash flow breakeven in 9 months at our current level of spend.”
If you’re struggling to think of some appropriate expected outcomes to include in your plan and message to investors, here are some ideas:
- Acquiring a meaningful number of new customers (potentially also expressed in terms of gained market share, if it’s an impressive figure)
- Opening a new market (see related article titled “Estimating Your Market Size“)
- Landing a strategic partner that will make a difference (see related blog article titled “A Secret to Securing a Strategic Partnership“)
- Reaching cash flow breakeven or better
- Significantly improving key metric (for example, for a SaaS company it might be CAC, CAC payback or churn. For a consumer mobile app it might be free-to-paid conversion rates.)
The concept is simple. Investors don’t care as much how you plan to use their money versus what you expect to accomplish with their money in your pursuit of a profitable exit. So crack open your business plan (see related article titled “Don’t Waste Time on a Business Plan” Doesn’t Mean Don’t Plan) and figure out what investors are really going to get for their money.
- Having Trouble Raising Money
- Getting to Closure with an Interested Investor
- How Much Should Your Raise
- Justifying the Cap Amount in Your Convertible Note
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