investmentFundraising is a tiring process which slows down/stops your product development. While getting an investment, raising too little will force you to start fundraising again before hitting a milestone. Raising too much will create an excuse for your team to slack off or result in giving too much equity early on.
What would be the ideal runway length a startup should target to be successful?
I think the answer depends on the company’s capital needs to reach product/market fit.
A typical consumer internet startup with low development costs, viral marketing potential, and no need for a sales force can make a lot of progress on $250k-$500k and twelve months. This mainly covers development, design, hosting, bandwidth, and startup costs like incorporation and a domain name. Examples:
–Instagram raised only $500k before raising a $7M Series A eleven months later.
–Snapchat raised $485k before raising a $10M Series A seven months later.
–Airbnb, which had a two-sided marketplace that required marketing and regulatory expenses, raised only $620k before getting enough traction to raise a $7M Series A eighteen months later.
A typical enterprise company has higher early costs of roughly $5M-$10M and a timeline of 12-24 months. Development cycles tend to be longer because enterprises have more feature needs and often security requirements. The first sales cycles tend to be long and require the startup to tread water before the contracts close. Examples:
–Yammer was incubated out of Geni, which raised $16.5M, and then raised a $5M Series A.
–Box’s first round was $7.1M in funding. It’s taken them nine years to IPO at a valuation of $2.7B, which is great but still 4x less than Airbnb and Snapchat.
A typical medical device company has even higher startup costs. I’ve heard one investor peg the typical needs at $25M-$50M and at least three years of development, testing, and FDA approval.
It’s thus not surprising that many entrepreneurs favor consumer internet startups. The markets are more crowded, and I would argue less impactful, but a lot easier to build and scale products in.
On raising too little or too much, I personally favor raising more than you need. You do have to create a hard-working culture and live with more dilution, but I think that’s easier than raising too little, constantly under-investing and moving slower, and living under the threat of constant death by starvation. But I think you can find successful examples of both.
Hope this helps. :)
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