IGNITE EXTENDED / LESSON 34
How much capital should be raised, for what progress, and with what evidence?
A funding plan and a prioritized diligence list.
The amount to raise should finance a coherent operating plan to a milestone that matters. A milestone can reduce technical, market or execution uncertainty. A calendar date or a completed activity is useful only when it supports a consequential next decision.
Connect each major use of funds to the evidence or capacity it is expected to produce. Then trace the resulting payments and receipts through the monthly model. Include a financing lead time and a stated buffer, while keeping hoped-for future capital separate from committed resources.
A larger round can reduce the immediate risk of running out of cash and may fund useful parallel work. It can also increase dilution, create pressure to deploy capital and set expectations for the next financing. A smaller round preserves more founder ownership but can leave the company exposed to a delay.
Compare alternatives using consistent operating scenarios and financing terms. The cheapest-looking capital in a base case can become expensive if it forces fundraising before the business has produced evidence. The decision concerns both resources and the conditions under which the next choice will occur.
A funding request should explain which uncertainty the money will address and how the cash schedule supports that work. Start with the decision rather than a round-size convention.
Define the consequential learning or capability. Example: demonstrate that a target customer can complete and repeatedly use the critical workflow under realistic conditions.
Identify the people, recruitment, build work and support needed. Trace activity into a monthly schedule. Include the time before new resources become productive.
Calculate the lowest cash point, a justified operating minimum and the effect of a coherent downside. A year-end balance can hide an earlier shortfall.
Explain amount, timing and what management will do if the milestone is delayed or rejected. Compare the commitment and flexibility offered by plausible funding paths.
The investor can now evaluate a connected argument: why this milestone matters, why this plan can reach it and why this amount fits the timing.
(12 + 3) × $50,000 − $100,000 = $650,000, before fees or other omitted cash flows.
Round size affects the operating plan, ownership and the choices available when evidence arrives. There is no useful comparison without an explicit milestone and cash schedule.
Can limit immediate dilution or commitment, but leaves less room for delay and can increase financing dependence.
Can fund more time or work, but terms, ownership, expectations and discipline still matter.
Illustrative application: a smaller round might finance a narrow pilot but leave little room for a delay. A larger round may permit a broader test while creating a larger immediate commitment and different ownership economics. Compare coherent plans, including what management does in the downside.
Justify the amount by activity, timing and review conditions. More months of runway do not automatically mean more useful learning.
Survey of 885 institutional VCs (Gompers, Gornall, Kaplan and Strebulaev). Share of deals closed in the prior 12 months by source: professional network 31%, proactively self-generated 28%, referred by others 20%, inbound from management 10%, referred by portfolio companies 8%, quantitative sourcing 2%.
Only about one deal in ten comes from a cold inbound approach. For Relay's Series A, warm introductions from the seed lead and from health-tech founders matter more than a polished outbound email.
For each closed deal, the average firm considers about 101 opportunities, meets management at 28, reviews 10 with partners, takes 5 into due diligence, offers 1.7 term sheets and closes 1.
Diligence is where half of the remaining candidates are eliminated, after the firm has already invested partner time. A data room that answers the decisive questions quickly keeps Relay among the five rather than the ten.
Average of 118 hours per deal: early stage 81 versus late stage 184, IT 76 versus health care 120, California 81 versus East Coast 121.
Relay is a health-care company raising a growth-stage round, so it should expect diligence closer to the 120-hour health-care figure, with regulatory and security review on top of commercial checks.
Share of VCs rating each factor important: team 95%, business model 83%, product 74%, market 68%, valuation 56%, fit 50%, ability to add value 46%, industry 31%.
Valuation ranks fifth. Relay's data room should spend its effort on evidence about the team and the business model (retention by segment, unit economics) rather than defending the $48M pre-money.
An investment memo contains factual evidence, interpretations and assumptions about what must happen. The diligence plan should concentrate on assumptions that could reverse the decision. The source’s screening funnel explains why attention must be selective.
For each material claim, specify the evidence available, the remaining uncertainty and a feasible check. A reference call, customer cohort analysis and inspection of an IP agreement answer different questions. Record contradictory evidence rather than burying it in an appendix.
The customer claim should agree with the chosen segment. The channel should be capable of delivering the projected sales. The model should fund the people and inventory needed for those sales. The financing terms should match the company’s capital path and incentives.
A contradiction between these elements is more serious than a missing slogan. Trace one representative customer transaction all the way through delivery, contribution and cash. This often reveals an omitted cost, a timing assumption or an activity that no participant is prepared to perform.
Diligence tests whether important claims survive inspection. Organize evidence so a reviewer can trace a conclusion to an observation, calculation or right.
Write the exact proposition: customers return after initial use, the forecast follows operating capacity or the company has rights to deliver the product.
Show the corresponding cohort, driver schedule or agreement. Label periods, populations and definitions so the reviewer can reproduce the reasoning.
Invite the strongest relevant alternative explanation. A customer count may conceal churn; a signed invoice may leave ownership unresolved; an average may conceal a cash minimum.
Correct the claim, obtain missing evidence or change the proposed commitment. Record the remaining gap, its owner and the decision that depends on resolving it.
A credible answer can acknowledge an unresolved issue. The funding proposal must make the practical consequence of that issue visible.
Team is named most important by 47% of VCs, fit by 14%, and product, business model, market, industry and other by the rest. IT investors pick the team 50% of the time; health-care investors only 32%.
Health-care VCs bet more on the horse. For Relay, diligence will lean on the business: clinical workflow fit, EHR integration rights, HIPAA posture and retention data, not founder charisma.
Bar chart of qualities by all, IT and health-care VCs: industry experience (60%, 54%, 77%), entrepreneurial experience (50%, 49%, 55%), ability (67%, 69%, 59%), teamwork (50%, 47%, 49%), passion (54%, 60%, 42%).
Health-care investors weight industry experience at 77%. Maya's years running a 6-location PT group are evidence to document, not just a line in a bio.
From 100 pipeline deals: 10–20 meetings, 4–8 in diligence, 2–4 term sheets, 1–2 closed. A preliminary memo precedes diligence, an investment recommendation precedes the term sheet, and a final memo precedes closing.
The memo is the investor's internal argument. Founders who know what the memo must say can supply the evidence for each claim in it, and anticipate the risks section.
Management, product offering, business model, market, financials, exit, deal terms and other (location, liability, conflicts, ethics, LP perception); the note warns each factor can be positive, negative, neither or both.
'Potential liability' and 'regulation' are where a HIPAA-regulated AI company is most exposed. A single factor can cut both ways: Relay's ClinicOS integration is a moat and a dependency.
Diligence questions: what do I know versus think, how confident am I about each consideration, and what must I know before investing. Some questions remain unknowable and become the memo's 'what you have to believe'.
Relay should state its own 'have to believe' list (for example, that group-segment retention persists beyond 12 months) and show what evidence narrows each one.
Diligence aims to verify important facts and learn more about key considerations. Typical items: management and customer references, market research, company visit, technical experts, financial model and return analysis.
The list predates AI and regulated data. For Relay, technical-expert review now includes the LLM vendor terms, model evaluation and PHI handling, and the return analysis uses the waterfall from lesson 32.
The archived case connects a Series A decision with operating assumptions, free cash flow and the timing of later financing. A larger number in a spreadsheet is not a complete capital strategy; the round must be tied to progress, uncertainty and ownership consequences.
What does the round allow the company to learn and achieve?
HHS published a proposed rule on 6 January 2025 that would make encryption and multi-factor authentication explicit requirements, require asset inventories and network maps, and require written verification from business associates at least every 12 months. The 2026 Unified Agenda lists final action for July 2027. Investors already ask whether a company like Relay could meet these controls.
Effective 1 September 2025, the law requires covered entities to keep electronic health records physically in the United States from 1 January 2026, and requires practitioners who use AI for diagnosis or treatment based on medical records to disclose it to patients. Whether and how it applies to a scheduling vendor depends on the facts and needs legal review, but data-residency questions now appear in diligence on Texas clinic customers and their vendors.
Sources: McDermott Will & Schulte: Final action on HIPAA Security Rule modifications now projected for July 2027 · Goodwin: New Texas law regulates use of EHRs and AI tools (2025) · NBER: How do venture capitalists make decisions?
Fictional company: $100,000 cash; steady net burn $50,000 per month; a milestone is expected in 12 months; management wants a 3-month buffer. Ignore fees and other cash flows for the base calculation.
Calculate the request, explain the milestone’s value, and model a 3-month delay. List the most important evidence an investor would request.
It is month 28. Relay serves about 250 clinic locations (≈ $1.2M ARR at list, illustrative), mostly in multi-location groups, with the 42-location Northpoint deal in negotiation, and has 22 people. Cash is $960,000: group sales and the Scheduler build spent faster than the Lesson 20 plan. Relay Scheduler's LLM inference has pushed gross margin toward 72%. The plan after the round averages $480,000 net burn per month (illustrative). The next milestone, Series B readiness, is 1,250 locations (≈ $6.0M ARR at list, 5× today) in 18 months, with group retention holding and margin back above 78%. The lead is offering $12,000,000 at $48,000,000 pre-money and will run health-care-grade diligence.
A one-page funding plan (amount, milestone, delay case, downside actions) and a prioritized Series A data-room index that names, for each decisive claim, the evidence and its owner, including HIPAA and AI-vendor items.
Relay's milestone is 18 months away, but the money must also cover the 6-month Series B process and a buffer. Funding only the milestone ($7.68M after cash on hand) leaves the company raising with no cash to spare.
A missing BAA with the LLM vendor, or vendor terms that permit training on Relay's data, can stall or reprice a health-care deal. Assemble them, and the near-miss incident record, before the first diligence call.
Investors test claims such as '3× retention in groups' or 'margin returns above 78%'. Index each claim to its cohort table, cost model or contract so a reviewer can verify it in minutes and see the remaining gaps.
Relay's Series A funding plan ($12.0M base, $13.92M delay case, month-12 burn-cut trigger) and a claim-indexed data room covering HIPAA and AI-vendor evidence.
Next lesson: Organizational culture: from routines to norms
Check your understanding
Question 1
Relay expects 18 months to its Series B milestone, a 6-month fundraising lead time and a 3-month buffer, at an average net burn of $480,000. It has $960,000 in cash. How much should it raise?
(18 + 6 + 3) × $480,000 = $12.96M, less $960,000 cash = $12.00M. $7.68M funds only the 18 months to the milestone; $12.96M forgets the cash on hand; $11.52M ignores the buffer and the cash on hand.
Question 2
The Series B milestone slips by 4 months while burn, lead time and buffer are unchanged. By how much does Relay's funding requirement rise?
Four extra months at $480,000 = $1.92M, taking the need to $13.92M. The buffer is a safety margin to keep, not a reserve the plan can spend; using it means approaching investors with no room left.
Question 3
To cover the delay case, Relay raises $14.5M instead of $12M at the same $48M pre-money. After the seed Maya held 30.41%. What is her stake after the Series A?
Post-money is $62.5M, so the Series A owns 14.5 / 62.5 = 23.2% and prior holders keep 76.8%: 30.41% × 0.768 = 23.35%. 24.33% is the $12M-round result; the difference is the cost of insurance against the delay.
Question 4
Relay's milestone is 1,250 clinic locations at $399 per location per month. What ARR does that represent, and how much growth from 250 locations?
1,250 × $399 × 12 = $5,985,000 ARR, five times the 250 locations (≈ $1.2M ARR). $0.50M is monthly recurring revenue, not annual; '4×' confuses an increase of 1,000 locations with the multiple.
Question 5
The lead investor has a week left in diligence. Which item should Relay put at the top of the data room?
A health-care AI company cannot operate if PHI handling or vendor terms fail review, and health-care VCs weight the business over the team. Market size is rarely the decisive gap at Series A; trademark items matter but would not reverse the decision.
Question 6
A founder argues: 'We have 27 months of runway after the round ($12.96M ÷ $480k), so we can start the Series B process in month 24.' What is wrong?
Runway counts months to zero cash, but the plan needs the raise to close with a buffer left. A 6-month process begun in month 24 ends after the cash is gone. Gross burn would overstate the cash need.
Workbook
Module output: A capital strategy, cap table, financing comparison and milestone-based funding plan.
Sources
Original pages and full documents are in the Library edition.