The two most important things to consider before any entrepreneur takes up VC funding are:
How much money to raise?
When to raise the money?
Both these questions are interrelated to each other because, more the experience an entrepreneur has in the market, more thorough is his understanding of the dynamics and nuances of his business.
The answer to the first question is twofold; the amount required is defined by the amount needed to take the business from the concept to product to marketing, less the amount you can invest in the business. The second parameter you need to answer yourself, is basically about valuation and stake dilution. One should run the start-up on a bootstrap basis for as long as possible without any external help or investment from any VC or Angel investor because VC funding could be costly. The cost is higher if the business idea or product is untested, which increases the perceived riskiness of the venture and hence a higher stake for the VC for the same investment. A venture would attract higher valuation when the venture has created some perceived value in terms of milestones like selling “x” number products in the market or reaching “y” clicks per day on the site. You also have to keep in mind that your stake would be further diluted when you raise subsequent rounds of financing.
If an entrepreneur raises excess capital than is required, (which happens mainly when the entrepreneur is highly optimistic or aggressive) he is spread pretty thin. He invests at a higher rate than the industry average and also employs more people at a faster rate which can create organizational problems in the company. When a start-up raises more capital than is required, it primarily invests resources to resolve future problems rather than the problems the industry or sector is currently facing. This increases the likelihood of the company going down if the industry or the economy takes a nosedive.
Raising lower capital brings problems of its own, as it might lead to the requirement of bridge loans that are more expensive than VC funding. Bridge loans also impose strict conditions on the start-up which might derail its growth in light of the strict repayment conditions imposed.
Given the uncertainty surrounding the business, start-ups should raise capital through a series of stake sales in amounts that are enough to manage their cash burn rates and simultaneously, keep something aside for any unforeseen costs/ expenses.
The answer to the second question is more idiosyncratic, as it depends on a lot of factors other than the cash burn rate of the company, including the type of business you are in (for ex. genetics has a long gestation period and requires huge capital investments but on the other hand e-commerce sites could initially require low level of investment and start making cash pretty early in their life cycle), the type of skills that are required, what the investors can contribute other than just capital in terms of their networks, etc.
The entrepreneur should not wait for his part of cash to burn out before he goes out to raise money because it tilts the balance in the favour of the investors to drive down the valuations of the start-up.
In nutshell, it should be a diligent mix of a proven model with enough resources at hand that you can handle the rejection from the investors, if the deal does not fall through, while you still have time on your watch to scout for another investor.