“I know this sounds crazy, but it’s actually easier to raise $3 million than it is to raise $300,000.” Yesterday, I was helping a wonderful founder plan his fundraise. Like many founders, he thought a small raise would be easier — but it’s not.

One of the weird things about venture capital is that raising a large sum is easier than raising a small one.

Signaling Risk

When I see a company raising a very small sum, I think to myself, “Why aren’t they raising more? Other companies are raising millions. Are they unable to raise?”

And if they’re unable to raise, is there something wrong with the company?

We don’t have much data to go on for an early stage startup. So investors pay a lot of attention to those signals, even if they can be misleading.

“What Happens in 3 Months?”

Let’s say a company is burning $100,000 a month and raising $300,000. What happens in 3 months?

If I’m putting a check into a company, I don’t want them running out of cash right afterward. So I look for 12 months runway after a fundraise closes. I’d prefer to see 18-24 or more.

Investors don’t want to see you limping along from small check to small check. They want you to raise significant cash and get the company to the next level.

Big Ambitions

Raising a larger round shows you have big ambitions. VC’s love ambitious founders.

Only a huge outcome will make the VC’s money. Their business model is to lose money on 30 investments and have a single company put them into the black.

Raising $2-4 million at seed shows that you plan on building this into a major company. Raising a couple hundred thousand may mean you just want to make a solid, small business.

That small business may be great for you. But it won’t get the VC’s paid.

Bringing in the Institutions

Most institutional lead investors need to write a check of $1 million or more at seed. If your whole round is $200,000, they can’t do that.

Now, you’re left with no lead.

Every other investor you meet will wonder why you don’t have a lead. Did they pass on the deal? Did you fail due diligence?

With questions like that in their minds, VC’s will just move on to the next deal.

Insiders vs. Outsiders

When you show up asking for $3 million for a seed stage startup, you’re showing that you know how the game is played.

You know what your company is worth and what it can raise. And you have the network to get it done.

When you show up looking for a $250,000 “seed round,” you look like an outsider. You look like you don’t know how venture capital works.

Fairly or unfairly, investors want to back insiders, not outsiders.

Wrap-Up

If you’re going to bother raising money, you may as well take down some serious cash. Aim for a seed round of $2-4 million.

You’re ambitious on signing customers, right? Bring the same ambition to your fundraise.

There will be no blog tomorrow for Thanksgiving.🦃 I’ll see you on Friday. Happy Thanksgiving, everybody!

More on tech:

Benchmarks for Valuation and Traction at Y Combinator

How Much Runway Do I Need?

Small Investors Lead to Big Investors

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