How to Raise Money From a VC

On whether to raise venture capital, how much to target, and how to spread it out

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Should you raise venture capital for your startup? If so, how much?

At first blush, the answer to these questions seems fairly obvious — raise as much money as you possibly can at the highest possible valuation in order to grow your business. John Doerr famously compared fund-raising to attending a cocktail party. When the waiter comes around with the tray of mini hot dogs, you should always take one. The reason being that you never know when in the course of the remainder of the cocktail party the waiter will make it back to you. In similar fashion, the right time to raise capital is when the capital is available; who knows if the fund-raising waiter will ever make it back to you when you decide you are in fact ready to raise money. But that only works if you’re at the right cocktail party.

Let’s start with the decision to raise money in the first instance, and specifically, the decision to raise from VCs. Just as with product-market fit — where VCs care about how well your product satisfies a specific market need — you need to determine whether your company is appropriate for venture capital.

The cardinal rule of VC investing is: Everything starts and ends with market size. No matter how interesting or intellectually stimulating your business, if the ultimate size of the opportunity isn’t big enough to create a stand-alone, self-sustaining business of sufficient scale, it may not be a candidate for venture financing.

Rules of thumb are overgeneralizations and crude ways to simplify complex topics, I admit. But, as a general rule of thumb, you should be able to credibly convince yourself (and your potential VC partners) that the market opportunity for your business is sufficiently large to be able to generate a profitable, high-growth, several-hundred-million-dollar-revenue business over a seven-to-ten-year period.

Your business might be helping people, enriching lives or even saving them, and still not be the right fit for raising VC.