Reasons to raise money from investors?


For what reasons do most startups raise money? What are the most common items startups that raise $1M+ spend it on?

Venture Capital Fundraising

asked Mar 19 '14 at 16:29
Kimberly Deleon
30 points
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3 Answers


It depends on the type of a startup, industry, and stage.

If you are in biotech, energy business or manufacturing, you might need $10-50MM just to setup a lab or a plant to get started. If you are trying to build a space rocket your entire budget is R&D.

Lets talk about a software company, since it's most common for this website, raising money for the first time.

1. Idea stage - money is likely needed to hire people to build an MVP, if founding team doesn't have all the necessary skills. Seed money from an angel could also be used for formation of the business (legal, trademarks, patents, etc).

2. Post MVP and pre Product/Market Fit - if there is traction money is likely needed for marketing to fuel growth or in case of B2B business a sales staff to bring on clients. If MVP isn't getting traction money is needed for salaries to execute a pivot from original idea. Pivots are executed until there is traction and product/market fit is found.

3. Growth - a combination of #1 and #2 - salaries and marketing/sales, depending on the type of growth and reasons for it. Winning a market share faster will call for more marketing $$.

Once a company raised funds, it needs to either a) become profitable, or b) continue raising funds until it becomes profitable.

I believe people who don't need money don't look for funding, it's too time consuming. Often startups seek "smart money", e.g. money that also comes with advice from an investor who likes to be involved and becomes a mentor.

answered Mar 21 '14 at 01:40
2,835 points


Simply: To survive long enough to get to the next batch of money (regardless of the source).

$1MM+ is a wide range, and there's a huge difference between teams raising $1MM and $100MM. I assume you mean "in the range of $1MM".

What is it spent on? Anything and everything related to running a business.

For some, that means intensive partying in the name of "being a Startup", also sometimes disguised as "marketing".

For others it means keeping the lights on and buying more noodles.

More generally, the ability to attract talent, pay bills and start to get traction.

answered Mar 20 '14 at 10:16
Nick Stevens
4,436 points


Depending on your situation, there can a wide range of reasons to raise money. The main two reasons are:

  1. You want to scale your business fast. Raising money takes away the pressure of becoming profitable right away. If you're bootstrapping, the pressure is always on to get revenues to at least a sustainable level.
  2. You want to use the name recognition of a VC to open doors that would be hard to without their contacts. Raising money is in a way validation -- someone was willing to risk real money on it.

That said, you should try to delay raising money as much as possible. It's always better to get some traction first on your own. That gives you tremendous leverage to negotiate terms.

What do startups spend their money on?...

  1. Salaries (usually the biggest expense)
  2. Marketing
  3. Infrastructure (servers, office space, etc)
answered Mar 20 '14 at 18:26
Nishank Khanna
4,265 points

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