How Much Money Do I Need from Investors?

May 29th, 2008

This is one of the hardest questions to answer. There is no “right” answer to be sure, but here are the considerations.

1) Raising money costs both time and money. It takes time away from other things (it is not uncommon to see revenue dip during a financing since attention is focused on the investment instead of sales), so you don’t want to do it often. Legal costs are also considerable.

2) On the other hand, raising money involves dilution. You don’t want to raise too little because you don’t want to have to do it all over again soon. You don’t want too much, either, lest you dilute your ownership more than necessary.

One rule of thumb is to seek enough cash to last 18-24 months. This allows a decent amount of time in between financings, both so that no one needs to think about the next round immediately- and so that everyone can get a sense of where the business is headed before diving into another set of negotiations.

All of this is really preamble to a fascinating hint of a different model I saw this morning. Sapphire Energy announced a $50M “open checkbook” financing that allows the company to draw as much money as it needs to commercialize its technology rapidly.

What does this mean and how is it different from a standard financing? At first blush it sounds more like “venture debt” where a company takes a line of credit from a bank and agrees to repay it in cash and/or equity, but Sapphire’s investors aren’t known for making those kinds of investments.

I am going to poke around a bit and see if I can come up with some more information on the terms of the financing. What was the valuation? How is management/founder dilution calculated? Is it less if the company doesn’t need all $50M over a set period of time? What if Sapphire needs more than $50M?

Truly new investment models are rare. It will be interesting to see what this one actually looks like.

P.S.  Sapphire’s business sounds terrific as well.  A highly scalable crude oil-like substance from algae.   Neat.

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  • Dilution-wise, it is sometimes better to plan an raising a different stages of the Company life, rather than a lot in the begining an trying to “live with it”… Also, I'd say that if you can convince good VCs to join in, the later rounds might also be easier, since they can/may want to participate alone or at least help you find co-leads for the future rounds!

    I'd say that in any case, it's better to be prepared from the begining have a raising-roadmap to avoid being stuck a few days before the mighty-cash deadline! Cash is king…

  • Dilution-wise, it is sometimes better to plan an raising a different stages of the Company life, rather than a lot in the begining an trying to “live with it”… Also, I'd say that if you can convince good VCs to join in, the later rounds might also be easier, since they can/may want to participate alone or at least help you find co-leads for the future rounds!

    I'd say that in any case, it's better to be prepared from the begining have a raising-roadmap to avoid being stuck a few days before the mighty-cash deadline! Cash is king…

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