Raising too much money limits your options

Friday 10th August has turns out to be a day of plagiarism for me, but this from Dick Costello of Feedburner fame (amongst other things) is a great point:

the astute first time entrepreneur in my audience is thinking “but I’m not looking to sell my company for 60 million either! My idea is huge, and I think it’s a home run and I want to go for it!” That’s obviously the right attitude, and it’s an attitude you will need, and it’s the attitude that your investors will want to see from you. Nonetheless, I don’t think it makes sense for most entrepreneurs to raise big A rounds, because you don’t want to price yourself out of interesting opportunities in the first year or two. By raising too much money, you force your hand on the kind of company that you have to build, whether you want to or not.

I have seen this countless times and can think of companies where it is happening right now.  The shame of it is that what could have been nice little investments end up raising a number of big rounds become a constant disappointment to all involved.  They probably also end up churning through a couple of management teams.
We are all aiming for billion dollar companies when we start out but the truth of history is that the vast majority of successful companies sell for well under $60m (I don’t have stats here, but I’m sure this is true).  The vast majority of companies overall are unsuccessful and don’t sell for anything meaningful at all.
The problem with raising too large a series A is that it can make lower exits unattractive for the investors, which means they won’t happen.  So raising too big a round ends up forcing a binary situation where the outcome is home run or nothing.

At Series A stage it is usually too early to be limiting your options like that.

On the other hand you don’t want to raise too little either – you should make sure you are getting enough money to get to 6-9 months after a valuation milestone so you can raise a good upround.  And give yourself a nice cushion so you have some margin for error.