How Much Money Should I Raise?

Entrepreneurs generally think that how much money they should raise depends purely on how much money they need. In fact, the amount of money you should raise also depends on the source of the money. The larger the VC, the larger the deal size.

1. Venture capital firms manage funds provided to them by their investors, and since VC firms generally have a stipulated dissolution date, they are often under some pressure to invest the money quickly, so that they can also exit their illiquid investments within time.
2. VCs are incentivized to manage larger funds rather than smaller funds. They receive an annual management fee of around 2% of the corpus that they manage, so the larger the corpus, the larger the annual fee.
3. It takes time to do a deal, and if you are managing a $500 million fund over a typical 10 year fund life, then you can only do the same number of deals as a $200 million fund. So the larger the fund, the larger the average deal size.

As a rule, VC firms tend to avoid doing deals that are smaller than a few million dollars, unless they manage a very small, first-time fund. Angels tend to invest less than a million dollars. As a result, if you are looking to raise an amount of money that is too much for angel investors and too little for VCs, you may need to re-think how much money you need. One way to do this is to extend your time horizon, and think about raising money from the same investor in stages over time. Another solution is to scale back your requirement so that you can appeal to angel investors.

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