Last month, I said I wanted to talk to you about storytelling. Before we get to that (next month, I promise), we need to cover one more topic, and it is the entire reason I’m putting pen to paper and explaining all of this… the fundraise.
When I run the accelerator at Case Western Reserve University, I make each founder answers the question: “How did you decide how much you want to raise?” I hear a variety of responses ranging from “That’s how much my competitors raised” to the dreaded “That’s how much I think I can raise.” I usually try to get them to a more impactful answer, namely, “Because it will let me accomplish X”.
Basing your fundraise on a competitor is a false equivalency. Sure, it could give you a better idea or benchmark, but it should not be the only deciding factor. Give yourself more credit that your business is unique.
Likewise, aiming for an amount because you think you can get it is just silly. Your pre-seed and seed round size is not a status symbol, a peer comparison, or a ridiculously expensive personality test. The key to deciding how much money to raise is the cost of reaching a result that makes the company more valuable, less risky, or able to choose its next move. The numbers come last. The milestones come first.
When founders think about what a round will allow them to do, their first notion is that more money will grant them more time. However, ‘two years of runway’ by itself is not an accomplishment. But it should be enough time to convert a pilot, finish a prototype, or reach a reliable Annual Recurring Revenue (ARR). You need to be able to answer exactly what that time will buy you.
Name the risk you are retiring
A useful milestone proves that your team can reduce a specific risk. There are two major types of milestones — development and corporate — and every fundraise should help accomplish both.
For a technical company, a development milestone might mean demonstrating performance outside the lab or proving that a manufacturing process is repeatable. For a software company, it might mean moving from founder-led pilots to repeatable, paid deployments. For a consumer company, it could mean showing that customers will reorder on their own.
Corporate milestones could be a more serious customer base, steadier revenue growth, evidence-based forecasts, or a believable product- and feature-release cadence. All of those make the business easier to evaluate for the next round.
Just remember, “to hire people and grow” is not a corporate milestone.
Match the capital to the job
Once the milestones are clear, determine which kind of capital is suitable.
Dilutive capital means selling ownership in the company. Non-dilutive funding — including qualifying grants and awards — can fund defined work without needing to sell equity, but often carries eligibility rules, restricted uses, reporting requirements, and a long application process. That’s not to say dilutive capital has no restrictions; it does, but it often comes with more freedom to spend, commercial validation, and commercial access.
Non-dilutive funding like SBIR/STTR (The two key programs in America’s Seed Fund), grants from the likes of ARPA-E/ARPA-H/DARPA (Advanced Research Projects Agency for Energy/Health/Defense) carry legitimate signals far beyond cash from a technical validity standpoint. Governmental funding can show that a technical business is truly developing along the commercialization pathway.
Before you choose a number or build an investor list, complete this sentence without using the word “growth”:
We are raising ___ to achieve ___ by ___, which proves ___.
Dilutive funding also carries value far beyond its dollar amount; first and foremost with the clout it provides. We all know the person who puts ‘funded by' Sequoia or a16z as the subtitle in their LinkedIn profile, and although in the Midwest we may sometimes hold a grudge about that, they do that because they know it comes with clout. It shows that they have support from investors with major capital stakes; their company is the cream that rose to the top. Most dilutive investors are also typically invested in their own success, which means they bring something critical to the table: follow on funding. Once non-dilutive capital is exhausted, you have to find more money.
There is not one straight answer for what is best for your business, and while non-dilutive funding is excellent for maintaining ownership, not every grant is better than every investment. Equity may be right for speed, hiring, commercialization, or work that a grant will not cover. Investors bring validation, relationships, and judgment. Different capital proves different things, and often, the most effective way to fundraise is a combination of both.
Make ‘use of proceeds’ earn its keep
While “use of proceeds” can be demonstrated on a simple pie chart, it contains more nuance than simple accounting. Payroll, Equipment, R&D, Sales, and Marketing all describe areas of spending, but leave out what changes because of each of them.
You should tie each major use to clear growth mandates that ultimately sum up to help achieve your derisking goal. R&D spending should retire technical risk through a prototype, test result, certification, or repeatable process. Commercial spending should create qualified opportunities, stronger implementation of a sales funnel, credible references, or improved retention. While operations and hiring should make delivery more reliable and revenue projections less fictional.
Let’s get back to the key question
The fundraising sentence I want founders to be able to say is: “We are raising X to achieve Y by Z date, so that M becomes the next rational decision.”
X is the complete cost - including people - outside work, delays, and contingency. Y is the milestone. Z is a credible deadline. M is what the new evidence unlocks: a customer commitment, a product launch, a grant application, a debt facility, a path to profitability, or another equity round. Keep in mind however, that M does not have to mean “raise again.”
That means thinking about the next financing decision before the current raise is finished, not because the company must always be fundraising, but because milestones, cash, and time rarely arrive in a neat line. The current round should buy evidence and optionality, not merely more months on the calendar.
As your now embedded and remote head of diligence prep, I have to give you some homework again:
Before you choose a number or build an investor list, complete this sentence without using the word “growth”:
We are raising ___ to achieve ___ by ___, which proves ___.
If the sentence is fuzzy, the problem is probably not your fundraising target, but your milestone. Fix that first. The strongest fundraising story is not “Here is how much money we want,” it is “Here is what this chapter will make true, and what the company can choose once it does.”
William Tavel is Director of the Veale Institute for Entrepreneurship Accelerator at Case Western Reserve University in Cleveland, Ohio.
