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Learn how a raise really works—from shaping your story to targeting investors and navigating term sheets.
Raising capital is a full-time job for at least one of the founders, for a period of months. Knowing who to talk to, what to expect, and what to look out for comes with time and experience.
When you decide that you’re going to raise capital, the first thing you want to do is to work out these 4 things:
| 1. How much do you want to raise? | • Only raise as much capital as you need for the next 12-18 months maximum. • If you raise too much, you’re just giving away more of your business than you should, and you’ll find it a lot harder to raise large amounts at an early stage • If you raise too little, you’ll have to start the whole capital raising process over again, within a matter of months | | --- | --- | | 2. What do you need the funding for? | See here for more details on this | | 3. What do you intend the timelines of the round to be? | I’d usually allocated at least 3 months for this, from stat to finish | | 4. What is your pre-money valuation? | • This may change later during Term Sheet negotiations, as investors will invariably value your business lower than you would ideally like • The size of pre-money valuation you can command is very much dependent on the wider investment market and macroeconomic conditions. • As a rule of thumb, at very early stage you probably won’t get a valuation higher than 20x your Annualised Recurring Revenue (as of 2025). Your product has to be pretty special for investors to go higher than this • That means that if you’re repeatedly making $10,000 per month from customers, $10,000 x 12 months x 20 = your maximum pre-money valuation will be around $2.4m |
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You also shouldn’t over-value your business at an early stage, as you run the risk of having to raise a ‘down round’ later, if the market shifts.
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You’ll need to inform any existing shareholders of your plan to raise capital - and give them the information on the ‘4 questions’ above.
Your existing shareholders will usually have a ‘pre-emptive’ right to a proportion of the value of what you’re raising, based on their percentage shareholding (depending on your existing shareholder agreement with them). For example, if you’re raising $1m in new capital, and one of your shareholders currently owns 10% of the equity in your business, they have the right of first-refusal over $100,000 of the round.
Right at the start of your capital raising process when you announce your raise to your shareholders, ask them to indicate if they’ll be taking up their pre-emptive rights for this round. They may not confirm straight away - which means there’s always a little balancing that needs to happen during the round as you try and confirm exactly how much is available in the round for net new investors.
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In the early stages, when you’re first looking to raise funding, there are 3 main places to raise capital from (ignoring getting funding from your friends and family):