Financing risk

Startups that raise seed funding face the risk of not being able to raise additional money. This is what is sometimes known as “financing risk.”

If you are a company that just raising seed funding, financing risk should be top of mind.  Here are some tips for mitigating it:

- Start by thinking about the next round of financing and work backwards.  What milestones do you have to hit to get VC funded at an upround?  If you are a consumer internet company, the milestone probably involves getting a certain number of users.  If you are building hardcore tech, it probably means building a working prototype.  Basically you want to take the main risks that exist at the seed stage and eliminate as many as you can. A good way to discover what milestones you need to hit is to talk to as many VCs as possible. Experienced seed investors can also advise you on this.

- Raise enough seed money. How much money will it take to hit those milestones?  A good rule of thumb is 18 months – 3 months to get going, 12 months to execute, 3 more months to raise VC.  But it really depends on the specifics of the milestones, your operational plan, etc. which is why you need to figure those out first.

- Preserve cash.  Pay only subsistance wages but be generous with equity for great people (this also provides a screen for hiring people with the right startup mindset).  Keep legal fees low (try to keep incorporation and financing costs to $10K or lower – this is one reason I prefer convertible notes).  Act like a scrappy startup.

A rule of thumb is a successful Series A is one that is led by quality VCs with a pre-money at least 2x the post-money of the seed round.

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