When I hear that a startup is raising $1M for their first non-friends-and-family round, my immediate thought is, “Oh, so you didn’t actually think about how much you should raise.”

Of course, this is a ridiculous thing to think, given that I don’t actually know how the founder landed on the (magical) $1M number. Besides, $1M could be the right first-round number for some startups. But, IMHO, it usually isn’t… and if it is, it is only an accident that it is.

I’ve met a lot of fundraising founders over the years, many of whom were raising $1M. I was even one of them myself in years past… a couple of times actually. Naturally, I didn’t ask every one of those founders to explain to me why they were raising the amount they were; but, as a mentor/advisor/investor for literally hundreds of founders over the years, I talked with a lot of them about it. I can’t remember a single founder who had a cogent reason for why they were raising $1M.

Here is how some of the not-cogent reasoning goes.

One million dollars is just the usual number. It’s what you do. This is the “nobody ever got fired for buying IBM” approach. After all, the only real difference between $900k, $1M, and $1.1M is that you don’t have to explain $1M. No one is going to say, “My god… what were you thinking trying to raise $1M!!” (Well almost no one. I’ve said it twice in the past week.)

Certainly, if you do the work and you determine that the right raise amount is around $900k, then $1M might be your right number. Similarly, if you determine that somewhere around $1.1M is the right raise number, then $1M might also be the right number for you.

These are margin-of-error calls and defending a $900k raise instead of a $1M probably isn’t worth it.

But I’m assuming that you’ve “done the work” to determine a right round to raise. If you haven’t done the work, then it could be that “the work” would tell you that $500k or $750k is the right number. In this case, just rounding it up to $1M can be a bad idea. If “the work” would have told you that $1.5M is the right number, then rounding down to $1M could be just as bad as (and probably worse than) rounding up.

If you raise too much, then you might be raising at a higher valuation than is healthy for the company. Higher valuation might sound great to a founder but it sets in motion an expectation for what you need to achieve before your next funding round. If you can’t at least 2x or 3x your prior valuation, it may look to investors like you failed to execute with the resources you had. Expect more friction on your next raise.

If you raise too little, then you could be in jeopardy of not having enough resources to achieve a meaningful milestone that could justify a 2x or 3x valuation increase before your next round. This outcome is the same as the prior example — you don’t look like a top-decile opportunity to investors. Again, expect more friction on your next raise.

“But,” you say, “venture capital is not a precision science. If you’re trying to be precise then there’s a good chance you’re doing it wrong.”

I am in violent agreement with you. In fact, in the Startup Haven Accelerator, we teach that the objective is to be only approximately right because the alternative is to be exactly wrong. However, this is not an excuse to not do the work necessary to get to an approximate right number. And there is always an approximate right number.

What’s “the work”, you ask? In short:

Know your right, next strategic milestone. It should match what the investors you’re pitching think a right, next milestone for you looks like.
Quantify and validate what resources you’ll need to do to reach that milestone. Resources include time, money, and talent.
Build a round (amount, valuation, terms) with your intended investors in mind, i.e., such that you look like a top decile opportunity to those investors.


Of course, ‘the work’ here is not so easy. But it’s not rocket science either and every founder can do it if they try. But founders are not explicitly asked or taught to do the work and so they don’t do it. Instead, they grind through months and months of fundraising with lots of investor encouragement of the form, “love what you’re doing… put us on your update list”… but no takers.

As we look forward to launching our next cohorts of the Startup Haven Accelerator, I am genuinely excited (no, really) to help founders do “the work.”