Preparing to raise capital (part 1)

I often get startups asking me what they need to do in order to raise capital. Raising capital at an appropriate good with appropriate terms is certainly no easy feast. There are many parts of the capital raising roadmap (a lot of which are covered in this Y Combinator Startup School class video) but in this post I'm going to focus on some of the basic technical attributes that every founder should know before starting conversations with potential investors

The business' value

How much of your company are you giving away in exchange for the capital you're raising, and is that valuation pre-money (the value of the business before the cash is added the business) or post-money (the value of the business after the cash is added the business)

For example, if you and your investor agree that your company worth $1m, and your investor is willing to put in $250k against a pre-money valuation, then the total value of the business after the investment would be $1.25m and the investor would own 20% of the business

However, given the same scenario and agreed company value, and instead your investor is willing to put in $250k against a post-money valuation, then the total value of the business after the investment would still be $1m and the investor would own 25% of the business

In the pre-money valuation example, the cash invested into the business is considered to be added on top of the current value of the company, whereas in the the post-money valuation example the cash invested into the business is considered to be part of the business' current value

Amount of money

How much money do you need for the business to build a de-risked path to a successful growth trajectory. This should be considered agnostic of the business' value and should consider things like operating costs (OPEX) for keeping the company alive and growing, and capital expenses (CAPEX) for things like hardware and software design and build to support your business' idea to create unique value in the market

Generally, for any new software company I would recommend you offshore your development to a high-quality technology agency in a country like Vietnam, and have strong technology and design leadership locally directing the architecture and experience of the product. Additionally, do the same by using offshore virtual assistants to assist with admin tasks, customer success and other operational items

The constraints that I suggest for a new company raising are: raise twice much as what you think you need, don't raise less than $100k, and don't run out of money in the first 12 months, launch your product with 40% of your total cash remaining in the bank

Final note

There are numerous other attributes that should also be considered including: founder obligations, who is paying the legals fees, non-disclosure requirements, rights to future investment, anti-dilution privileges, conversion options, liquidation or IPO clauses, voting rights, board seats, and so on but these are the types of things

In part 2 I'll be covering other pre-investment considerations: company milestones, investor profile(s), capital table structure, and so on