In a recent interview with Fortune, Scott Kupor, managing partner at Andreessen Horowitz, discussed how to raise the right amount of venture capital. Picking the amount of funding to raise is a common question our clients ask us, as we help them prepare for a venture round. So we thought that we’d use Scott’s wisdom as a jumping off point to discuss how much VC to raise.

How large should a venture round be?

Andreessen’s Kupor says, 

People don’t always think critically enough about what is the right amount of money to raise. What we try to encourage entrepreneurs to think about is: Think about what the story is around the milestones you’re going to want to tell at the next fundraise. When you’re raising the Series A round, think about what you’re going to tell your investors at the Series B round. And then you can back into your number.

Basically, in order to know how large of a round to raise, you need to 1) know what milestones you’ll have to hit to be worth more and be successful in the NEXT round and 2) have a strong idea of how much cash you’ll need to achieve those value creation milestones 3) have capital expectations inline with the industry and opportunity. 

How valuation creation milestones impact the size of a VC round

How do you know what the milestones are for your business? One way is to look to businesses with similar business models. This is easy enough in deep spaces like enterprise SaaS, eCommerce and biotech. Find the companies that are similar to your startup - and that are successful at making it to the next stage - and understand the metrics they used to drive their fund raises. For example, for SaaS startups, investors expect a certain level of revenue growth over time, and are looking for that trend to continue after the fund raise. For biotech companies, investors expect particular scientific milestones, and eventually, clinical trial data.

How do you determine how much cash you’ll need to hit those milestones? 

This is where your startup will need to develop a financial model

For very early stage companies, this can be pretty “back of the envelope.” Typically, the majority of your expenses will be headcount, with some legal and product development costs, potentially some rent - nothing too crazy. You can model out your salaries + benefits, add in a few new heads, get your rent, reserve some $ for product development and don’t forget legal expenses. Then, estimate the number of months you need to reach the value creation milestones. Make sure you have enough employees to get you there - if you have a lot of product development work to do, you need to have enough engineers, designers, researchers, etc. 

For later stage companies, the process can become more complicated. In this case, I would suggest consulting your investors to make sure you know what the milestones are first - then build your budgets and projections to get you there. Work closely with your team to design the projections. For example, if believe that you need a certain amount of revenue growth before the next round, make sure your sales and marketing leaders know what they’ll need to achieve, and can articulate back to you what it will take to get there. Don’t be afraid to tell them that they need to be economical, but do make sure to include them in the process so that you get their input and buy-in.

Regardless of the stage, it is a good idea to pencil in a few extra months of burn. Adding 25% to the amount that you think you need is a safe bet, assuming you can raise it. 

Fit the capital raise to the opportunity

Don’t make the mistake of trying to raise millions of dollars for a company that will only generate a small amount of revenue or profit. VCs, and you, should want to size the amount of capital needed to the market opportunity. Big markets can support bigger players, meaning you can raise more capital to get there. You also need to compare yourself to other startups in the space. While it is totally possible to raise 3 or 4 times more than the other competitors, planning to be the most capital-intensive company can put potential investors on alert. Make sure you know what the competition has raised, and if you are doing something dramatically different, have a compelling reason.

How long should a venture capital round last?

Typically, a Series A and beyond VC raise should last at least 18 months. Your existing investors (and new investors) will have their own opinions, and may want to discuss how you’ll stretch to get to 24 months with the capital. (Side note: Venture Debt, which we consult on, is a way to get lower cost startup capital). Today, we are seeing our hottest startup clients raising their B’s and C’s faster than expected, well before 18 months and well before they are running out of cash. This is a symptom of the hot venture capital market, but also a testament to our clients, who are clearly hitting their value creation milestones quickly due to phenomenal execution. If your growth (or other metrics) are strong enough, you can raise before you are low on capital and sooner than 18 months. 

Seed investments have been very different recently, with many companies raising multiple seed rounds. The rough rubric of 18 months of runway are becoming increasingly less meaningful for today’s seed rounds, making it more difficult to know how long your seed round should last. Regardless, make sure that the amount you are raising in a seed round will get you somewhere more valuable. Even if your seed investors are telling you that they are offering you an open checkbook, you should strive to have proven or learned or built something more valuable by the time that you have to ask for additional seed funding!

Putting together a projection model is an important piece of your fund raise. Our clients have raised over half a billion dollars in venture funding in the past 12 months, and we have experience helping companies get their projections in order. If you need help with a financial model, reach out to us today!