How to think like an investor: Understanding the actual cost of fundraising

Why is venture funding so confusing? Isn't the formula simple?

The presumption that a company knows what its investors want is a tall one. The financial and non-financial milestones that investors expect a company to achieve between raises can be vastly different between stages.

It can be hard to project how long it will take to achieve these goals. Is it correct to assume that the singular goal is minimizing dilution?

With the caveat that every company journey, fundraising environment and investor preference is different, let's put aside all of the truths we think we know and start at the beginning.

The first question a founder must answer is how much money. The question considers a lot of inputs, but the three that are the most opaque to founders are:

Capital is dramatically more expensive at the early stages because there are major risks involved and the probability of a successful outcome is low.

1. How expensive is venture capital (as defined by the amount of dilution)?
2. What financial milestones will investors expect me to reach between each raise?
3. What are the more subjective milestones I need to hit to evidence I’m ready for the next raise?

Take these questions one at a time.

How expensive is venture capital?

We need to understand if the output is what we should solve for during each raise. Let's look at the amount of dilution companies that have taken at each stage over the last several years. Let's look at the dilution for each $1 million raised.

It costs 10% of the company for every $1 million raised in a seed round. Each $1 million of capital raised costs 2% by Series B and 2% by Series E.

As a company grows, the cost of capital decreases. The Venture Capital Price Curve is a decline in the cost of funding at progressive fundraises.

Does the Venture Capital Price Curve show that the singular goal of a company fundraise should be to minimize dilution? Not quite.