When thinking about how much money you should raise from investors, think backwards. First, figure out which milestones you want to hit. These should be meaningful BHAGs – Big Hairy Audacious Goals. Usually, these milestones are achievable in an 18-24 months timeframe. Then, you have to build a plan in reverse that is designed specifically to achieve the milestones you created in the future. In this way, you are actually building your plan backwards, starting with the milestones in the future and working in reverse to the present. Building out a detailed financial model of what will be required to achieve those milestones gives you the total amount of funding you’ll need. And be sure to add a small buffer for unknowns along the journey.
Even if you’re bootstrapping, you always have an investor. You are your business’s first and most important investor. And you invest something much more important than cash – your life. You put everything on the line to attempt a treacherous mountain climb, upon a crumbling path that is littered with the tombstones of failed startups. If you give anything less, quit now. You’ll never make it halfheartedly.
Since you’re the first investor, you must evaluate your business as an investor would. Is the industry good? Is the market receptive to new entrants? Can I make enough money to be happy in the long run? Is the reward worth the risk? Is the go-to-market plan realistic or a pipe dream? Pretend that an entrepreneur trying to raise money pitched you your company. Would you invest 20% of your net worth? Be honest with yourself! This is one of the hardest things for entrepreneurs to do, but it’s also one of the most important.
If you come to the difficult conclusion that you wouldn’t invest, what holds you back? Can you fix or mitigate the issue? If you can’t justify investing 20% of your net worth, how can you justify investing your life? Don’t rush into a business that isn’t right for you. Take your time, and wait for the right idea. It will come.