When it comes to funding your startup, is there such a thing as raising too much money? We could say “yes” and give you some really good reasons for our answer. Having too much money has been a curse for many startups. But we could also say “no,” giving you equally compelling evidence that having too much money can be a blessing.
Like so many important questions that come up in VC discussions, the answer, of course, is “it depends.” In this blog post, we’ll try to sort out some of the factors to consider, so you can begin to answer this question for yourself.
Yes, there is such a thing as raising too much money for your startup
While some might think of having too much money as a “good problem to have,” it can actually lead to real problems. One possible problem is that you may be setting yourself up for a down round in the future. Another potential problem is that you may be setting unrealistic expectations for your company. In the market’s eyes, a well-funded startup often has little excuse for not delivering on its potential, regardless of other factors. And finally, having extra cash in the bank can tempt founders into spending money on things that don’t move the needle in the right direction.
Raising too much money can also strain investor relations or even jeopardize future investment. Your investors want to know that the money they’ve given you is being used to grow the company. They don’t invest so that the funds can gather dust in the bank. They want to see that you’re putting the money to good use and that their investment is making a difference.
Consider too that your business may benefit from not having too much money. Constraints of any kind – including financial ones – can often spark the most creative ideas.
No, there’s no such thing as raising too much money for your startup
If your company wants to go places – and get there fast – you’re going to need plenty of fuel. If you’ve got ambitious goals and the strategies in place to meet them, a ready supply of cash can help you accelerate your progress. Having more than enough money on hand means you don’t have to pause and think about whether you can afford the next step. It also means not having to stop what you’re doing and switch your focus to raising more capital.
It’s only when you start spending just to spend that a flush startup starts to get into trouble. Inexperienced founders with direct access to a large bank account may feel inclined to throw extravagant parties to celebrate minor victories, take everyone to Hawaii for a team bonding experience, or decorate the office with Herman Miller chairs.
Founders can also get into trouble if they start putting money into legitimate engineering and marketing endeavors without tracking productivity and performance metrics. You can easily spend $500k per month on marketing but only marginally increase your revenue. Not all initiatives are created equal, but you won’t know what works and what doesn’t – what’s a good spend of your funds and what isn’t – if you don’t track the results.
So just exactly how much money is too much money?
Again, the answer is “it depends.” Every founder and every investor has their own opinion and their own comfort level. Some say you should have enough to get you six months beyond your next milestone, while more conservative founders will want 18 months of runway in the bank. Many would agree that any more than that might be too much, especially if you don’t have concrete plans for the funds.
Another factor to consider is the number of people you’re raising funds from. A large pool of investors can leave a founder beholden to too many individuals, in addition to cluttering up your cap table. Raising money on a platform such as MicroVentures can be beneficial by pooling investments from multiple investors into a single fund, helping to keep your cap table nice and tidy.
Whatever amount you’re raising, make sure you have a specific plan for the use of proceeds, and plan to raise a little more beyond that. If you can’t articulate what you’re spending the money on, you probably need to reassess your fundraising target. You should also be realistic in your fundraising goals. If you set the bar too high, it can reflect poorly on your company if for some reason you don’t reach it.