Magic Graph: How Much Seed Capital Should You Raise?

When thinking about how much seed capital to raise, we need a more sophisticated lens than just the old rule of thumb of “18 months of runway.” This is especially crucial given that the 18-month timeframe is a bit circular — a founder can always just take whatever amount she closes and divide by 18 to determine what her monthly burn rate should be. The true question, however, is if that level of spending will result in enough progress to successfully raise that next round of (hopefully) Series A capital.

So in reality, a milestone-driven, needs-based approach to determine the right amount to raise in a seed round is to build a financial model, adjusting for real-world scenarios and considerations, adding a fudge factor, and accounting for optics.

But before you get that far, there is one additional factor to consider to determine the right amount of seed capital to raise: an honest reflection of your fundraising ability.

There are numerous dimensions which can affect the capacity of an entrepreneur to fundraise, after all: experience, amount of traction in the business to date, industry category, geography, accelerator involvement, and so on. Fundraising is rarely easy, but it can be much less difficult for some than for others.

So how do you consider these many factors, in particular your ability to fundraise as a founder, into a headline “target” for your seed fundraise deck?

Let’s first consider a correlation between effort (on the x axis) resulting in more capital raised (y axis).

magic graph 1

At first, fundraising goes slowly (…until it goes fast), as it takes a while to set the direction for prospects and to work through the kinks in the story and pitch. Those first few days and maybe weeks won’t yield much capital if any at all:

magic graph 2

But soon, for any successful fundraising effort, the more effort you put into fundraising, the more results it will yield, in meetings and eventually in capital:

magic graph 3

Spreading your network broader to pitch more potential investors will inevitably result in more capital being available:
magic graph 4So far, this is somewhat expected – if it’s a good team, product, and market, effort in means results out. However, this is where the model becomes so important. At some point, an entrepreneur begins to exhaust her network, and her network’s network, and the incremental hours devoted to fundraising will begin to yield less capital raised than the previous.

There begins to be diminishing returns to devoting more time to fundraising:

magic graph 5Eventually, a founder reaches a point where, given the state of the company, the team, and the traction to date (and all of the various factors), more time devoted to fundraising just isn’t worth it.

This means there is a theoretical “maximum” amount an entrepreneur can raise at any point in time in the seed stage. For some, it may be just a couple hundred thousand, for some, $1M or $2M, or for others, even more.

Here’s the biggest takeaway in this exercise:


That point of diminishing returns is NOT actually the magic number you want to raise. Instead, your magic fundraising number is actually the one which corresponds to approximately 80% of effort devoted to reach that highest point. Right when the curve begins to bend and fundraising begins to feel increasingly difficult is the moment where you’re better off ending your fundraising process and devoting the entirety of your attention to building the business.

At this point, a CEO’s energy should be focused on efforts which will increase the ability to raise capital in the future, which is now best done through accomplishing key business milestones rather than more legwork on an existing fundraise.

magic graph 6
Of course, it’s impossible to know before embarking on a fundraising process — seed or otherwise — what that exact, optimal fundraising target should be. But the above heuristic does force you to ask the right questions. The point is not to ask, “What’s the most seed capital I can raise?” but rather to ask, “What’s the most amount of seed capital I can raise without increasing difficulty?”

The answer to that question provides the most useful data point to then answer the real question: “How much seed capital should I try to raise?”

The goal of fundraising shouldn’t be about maximizing dollars raised but rather optimizing the balance between effort and amount.

David Beisel

David Beisel is a co-founder and Partner at NextView Ventures. He has been focused on early stage Internet startups his entire career, both as an entrepreneur and venture capitalist. As an investor in the digital media space, David was most recently a Vice President at Venrock and previously a Principal at Masthead Venture Partners. Prior to becoming a venture capitalist, David co-founded Sombasa Media, an e-mail marketing company best known for its flagship product BargainDog. Sombasa was successfully acquired by where David served as Vice President of Marketing. David holds an MBA from the Stanford Graduate School of Business and an AB in Economics, magna cum laude and Phi Beta Kappa, from Duke University. He also founded and leads the Boston Innovators Group, an organization which holds quarterly entrepreneur events drawing a thousand attendees.

  • Boris Revsin

    David, great post and mirrors our experience exactly.

  • David Blutenthal

    David, great framework and concept. The key as an entrepreneur is being aware enough to know when you’ve reached that 80% inflection point where continuing to raise produces diminishing returns.