Union Square Ventures’ Fred Wilson has one simple principle when it comes to how much money startups should raise: less is more.
Mark Suster, a partner at Los Angeles-based VC firm Upfront Ventures, interviewed Wilson about how much money a company needs to raise to be successful.
“I just think if you’re forced to figure out how to get from here to here on a million bucks, if you’re good, you’ll figure out how to do it,” Wilson said.
Here’s Wilson’s advice to small companies that are just launching: startups should raise 12 months of capital at the seed round, 18 months’ worth of capital at the Series A and B rounds, and for Series C rounds and beyond, raise 24 months of capital or more.
“I think there are some instances where you need a lot of capital to execute a business plan, but in many cases it’s not true,” he said.
Too much funding can have a bad effect on the decision making process, Wilson says.
“But because lots of capital is available, the company takes on the capital and then that ends up resulting in no constraints on decision-making, and so a company decides to do five things instead of one, and they do five things poorly instead of one thing well.”
In fact, Wilson says too much money can be a bad thing for a really young company.
“A seed that gives a company four years of runway, what does that say? It means the people raising the money don’t think they’re going to make it in a year,” he says. “It’s a bad signal that an entrepreneur would be willing to take four years of dilution when what they really should do is take a year of dilution and then in a year increase their value 3x. It means they don’t know what they’re doing, or that they don’t have confidence that what they’re doing is going to work.”
You can watch the full video below: