Use of Proceeds

One of the most important skills founders must hone is their ability to tell a compelling story. Part of that story, if they plan or want to use venture capital as a tool to grow, is articulating how much money they want to raise and what they plan to do with that money. 

When raising capital, it amazes me how many founders will say something along the lines of, “Well, right now the market for Series A companies is $X, so that’s what we want to raise.” I find that type of finger-in-the-wind talk extremely lame and weak. It means that you haven’t taken the time to truly think about what your goals are - e.g., growth objectives, what you need to learn, build, and prove, and what resources you need to accomplish those things - and the capital requirements to get them done. 

One of the things my investors taught me is that entrepreneurs need to be good stewards of capital, and part of that is having a very keen sense of what to do with it. When raising money at groupme and fundera, we always had a crystal clear idea of how much money we wanted to raise and why. Sometimes it was to be able to pay for some rapidly accelerating variable costs attributed to our fast growth; other times, we needed to invest in hiring people with different types of skills to build things like new mobile clients, or we wanted to scale a sales team after we had a basic sense of our payback periods and how we’d operationalize onboarding and ramp cycles. This wasn’t rocket science or even calculus, it was just a simple model we’d build in a spreadsheet. It demonstrated that we had some modicum of an idea as to what we’d spend money on, when we’d spend it, and why. And it’d be reflected in a basic pro forma and financial model that would grow in sophistication as we learned more about our business over time. 

Some frameworks for this can be a simple comparison of what your company looks like today versus what it will look like in a future state due to this fundraise across a series of different attributes: team size and composition, customer or user growth, revenue growth, product features, releases and milestones or markets you’re live in, etc.  Demonstrate and convey what will be different about your business when you raise the money. “We want to raise $10m to accomplish these things and have some buffer to invest in new initiatives opportunistically” is an infinitely better answer than “$10m feels right for us.” One shows you might be a thoughtful steward of capital, and the other is a total turn-off. 

The process of doing this work isn’t super time consuming, and it’s remarkably important to help you think through just what it is you want to accomplish with money. If you’re asking for capital, at least have the wherewithal to answer these basic questions for yourself let alone investors. You’re selling a piece of your company. Be thoughtful about why you want to do that and why it will be worth it. 

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