In my prior posts on the entrepreneur’s and investor’s perspective on the right amount of capital for a company to raise, I outlined the numerous conflicting incentives each group faces. I also made the point that good VCs know that once they have made an investment in the company they will be on the entrepreneur’s team and therefore want the company to succeed which means helping the entrepreneur raise the right number.

There is another consideration that entrepreneurs need to engage: how much they should tell the VC they are raising when asked.  There is no right answer to the question, but there are a couple of dynamics to be aware of. 

First, the number that you quote may be different from what you actually raise. As you begin to work more closely with VCs they may advise you to take more or less depending on the needs of your company. VCs are aware of this dynamic and aren’t going to hold you to the exact number that you quote. So don’t feel too much pressure when you give this answer - you’re not going to shoot yourself in the foot.
However, you should try to give your best answer to this question. You could frustrate the VC and embarrass yourself a bit if you are off by an order of magnitude. It looks bad if you say you are raising 50MM when you only need 5MM.

The next dynamic to be aware of is that VCs understand that there is rarely one answer to this question. With more money you will be able to increase your headcount our expand your marketing budget. It can be difficult to find the right balance that positions the company for success and has acceptable implications for all parties involved. Again, a good VC should help you navigate this balancing act.

Given these dynamics, I think the best answer to this question is a range. Offer a low number that still is enough to enable the business get to the next round of funding and a high number that will help the company more rapidly achieve its short term goals. Be sure to be prepared to tell the VC what you plan to do with each level of investment - so they can understand the differences in the scenarios (e.g., more sales people, etc.).

Offering a range is the best answer for a few reasons:

1. First, it helps the VC understand how money can drive growth in the company.
2. Second, it demonstrates how thoughtful you are being about how to operate and finance the company.
3. Third, it signals to the VC that you are going to be a flexible partner that is willing to work toward the solutions that are best for the company.
4. Fourth, it’s a lot easier for you to create some reasonable scenarios than it is to definitively decide the optimal amount of capital for your company.