The most important principle of start up fund raising is:

Raise enough money to achieve a set of milestones that will attract a subsequent round of investment from new investors.

Last week, a founder of a seed stage company came to pitch. When I told him the opportunity wasn’t a fit for us, he asked me what milestones he would need to achieve to raise a Series A - as he was raising a seed round! He was calibrating how much he needed to raise for in his seed to make sure he could raise a Series A.

After we spoke, he drafted a financial plan to calculate the size of the seed investment he would need to achieve those milestones and added a reasonable cash buffer. In effect, he reverse-engineered his Series A.

This is the same process investors follow when investing in a company. During the term sheet negotiations, VCs and founders discuss the size of the investment and the corresponding milestones the company will be able to accomplish with more or less cash. Like founders, investors are concerned about follow-on fund raising risk and reverse-engineer the next round to mitigate that risk.

The long term success of a venture-backed startup hinges on the ability of the founding team to raise follow on capital to finance research, fuel product development, discover product market fit and ultimately scale sales and marketing. To minimize financing risk, raise a seed that will enable you to raise an A. Raise an A to raise a Series B and so on.