When to raise your next funding round

Many founders wait until the money has almost run out and only then rush to look for investors. This is one of the most common and costly mistakes. The right moment is determined not by a single factor but by a combination of three: runway, progress and the time the process itself takes.

Let's start with time. Raising a round takes much longer than it seems. For a Series A, the process from the first meeting to money in the bank usually takes three to six months. Andrew Chen, a partner at a16z, sets aside six months specifically for a Series A in his calculations: if you have two years of money in the bank, you realistically have about 18 months left to work. This leads to the runway rule. Y Combinator recommends starting when you have about 12 months left, and no later than when you have six. If you have less, you end up in what Paul Graham calls the “fatal pinch”: your negotiating leverage disappears, and investors can sense it.

The second factor is progress. The question is not “How much money do we have?” but “What will we prove by the next round?” One approach cited in analyses of YC materials is “growth matters more than milestones”: Geoff Ralston, YC's former president, called a product that is quickly gaining users a sign of readiness, and described 10% weekly growth sustained over several weeks as an impressive result. Another approach: ask yourself whether what you achieve with the new round will let you raise the next one at roughly double the valuation. If so, the round is structured correctly.

Hence the practical rule for the amount: raise enough to cover 18–24 months of work. Six of those months will go to the fundraising itself, and for the rest of the time you work toward the milestones that justify the next round. If the milestones have been reached but your runway is still long, you can start talking to investors earlier: good metrics are the best argument.

Take Airbnb, for example. In April 2009, the company received about $600,000 from Sequoia Capital. It closed its next round, a $7.2 million Series A from Sequoia and Greylock, in November 2010, roughly a year and a half later. By then it already had 700,000 nights booked in 166 countries, with 80% of them in the last six months. In other words, Airbnb went out to raise money when its growth accelerated, not when it ran out of cash.

And finally, take the external environment into account. The time of year and the state of the market affect how quickly you close a round, so have a backup plan in case the deal drags on or falls through.

Sources:

1. Y Combinator, guide to Series A — VC Café, YC's Guide to Series A
2. Y Combinator, Geoff Ralston — as summarized by Echai Ventures, Raise money
3. a16z, Andrew Chen — Andrew Chen Archives
4. BetaKit — Ask an Investor: How do I decide when to raise my next round?
5. VC Beast — Series A Funding Guide
6. Airbnb — Vator, Airbnb raises $7.2M and Reuters Events