How much should I raise in my angel round? How should I spend it?

fun couponsIn 2015, I suggest consumer internet and enterprise startups raise $750k in their Seed round. If you’re a hardware startup I would double that.

This will give you 18 months of runway if you burn $35,000 a month, and have $120k in legal, accounting, and capex spending (your laptops). Hardware companies will need the extra $750k to do a crowdfunding campaign, tooling, and a small production run of their product.

[ Click to Tweet (can edit before sending): http://ctt.ec/30pU5 ]

$35,000 per month is enough for four team members to work on a problem for 18 months, while having a decent salary — and a $500 per month desk.

You’re not going to get rich off your salary, nor should you. If you wanted a max salary you would be at Google or Facebook refining their glorious ad networks to target just a little bit better every quarter — and hate your life!

How should you spend your angel money?

The typical composure of a great team, as I can tell, is something along the lines of:

— two developers to manage the code, process, ops, and customer support

— one product manager to do UX, design, product testing, and customer support

— one business head to do operational, fundraising, sales, legal, marketing, and customer support

You’ll notice that in this case your four people are doing at least four jobs each. Everyone is doing customer support, because early in a company’s life everyone has to commit to understanding the customer.

These four people, the founder(s) and founding team, have to be absolutely willing to do anything. Not everyone in the world is comfortable with the concept of “we have to get it done with what we have,” and that’s OK.

Make sure it is clear to everyone that your expectation is that when the doorbell rings they have to go sign for the package, and that there is no one to set up their desk or buy them a laptop.

When your startup gets more funding, you’ll actually have the delightful duty of taking jobs away from people. In most cases this will be awesome. “We got an ops person?! Awesome!”

In some cases you’ll get the opposite. “You’re taking sales and marketing away from me? Why, do you not trust me with them?”

How should you not spend your angel money?

If you are lucky enough to get $750,000 — a huge amount of cash in the real world — you should make sure 90%+ of it goes into the product (some things can’t, like legal, office space, and laptops). You should certainly not spend your money going to conferences (unless it results in a sale: read this), or fancy office furniture (buy cheap junk, or rent), or a fancy office space (leases kill startups — don’t do it!).

Every dollar needs to get into the product, and since the product is made by people (generally speaking) you should make sure that 80% of your spend is on payroll. Anything else is probably wasteful and unnecessary.

The biggest win after angel investing

I just got out of a meeting with an awesome startup I invested in last summer. They had $10k in monthly SaaS revenue and they are now at $100k per month. They did this in seven months and I am going to put more money into the company — obviously.

This is the absolute best-case scenario: your angel money generates enough revenue to match — or exceed — your spending. This scenario is called “profitability,” and although it is very rare in Silicon Valley it can have an amazing impact on your future!

Now that this seven-person startup is generating more than they spend we have a delightful road ahead of us. We will visit the top three venture firms with our heads held high and say, “we are thinking of raising our series A, but we are not rushing to do so because we are profitable.”

And when the venture Gods hear that, they will rain down upon us great term sheets with honorable terms. Terms that we will negotiate in good faith to be even more in our favor, giving us control of our destiny for years to come!

Or — they could have gone to a bunch of events, spent a week picking out cool desks, and ran out of money before getting any product traction. In that case, the VCs look at you and say, “well, if you didn’t get it done in 18 months there is no reason a check from us will change the fate of this business.” That’s how they think. It’s that cut and dry.