AngeBlog by Basil Peters

The Optimum Financing Strategy for Angel Investors and Entrepreneurs

Designing the optimum financing strategy requires future knowledge of several variables. Even worse, some of the variables are not controllable, or even knowable.

For example, almost every plan that was based on closing a tech financing in late 2000 failed. Even early-stage, angel financings did not complete because the public equity market crash decimated tech investors' confidence.

This type of unpredictable event gives credence to the adage of "raise all the money you can when you can because you never know what's going to happen" (and people said that long before September 11, 2001).

But assuming stable macro-economic conditions, there is usually an optimum financing strategy.

The most important, reasonably 'knowable', factor in designing the optimum financing strategy is to determine when the company will achieve a significant, value increasing, milestone.

The optimum strategy is to raise only as much money as you really need to get through the value increasing milestone, plus enough to fund the company through the completion of the next round, with a reasonable buffer for unexpected delays.

This strategy is optimum for several reasons, it:

The reasons this incremental financing strategy requires less management time overall include:

Many larger funds will argue with this strategy because their structures make it difficult for them to write smaller checks. These funds will often want to invest more than the company really needs early on when the price is most attractive. Unless the company really needs all of the money to execute on the value increasing milestones, this is also generally a bad thing for the company's culture and DNA.