At Alley Insider Startup 2009, there was a panel called "How to raise a boatload of money at a huge valuation". The implication was that, every startup should go for that if they can. I actually think that's one of the worst things you could ever do as a startup--and it proves over and over to be a trap for many hot startups or people raising money from unsophisticated investors.
Let's start with the basics. Very few startups that last over the long term ever raise just one round of money if they choose to take outside financing at all. Therefore, you need to think of your first financing as groundwork for future ones--each at nice, incremental step ups in price at an appropriate size given business or product milestones and goals. You want to avoid down rounds and getting your earliest and most supportive backers wiped out. While you might be able to negotiate a sweet deal now, you have to ask where that leave you the next time.
Take the example of someone trying to raise just 600k. Let's say they're offered a pre of 1.8 million--meaning that cash buys a quarter of the company. You might not think that's such a great deal. Someone else comes along and offers 1.2 million on a pre of 3.6--double the money at twice the price for giving up the same amount of the company. What's not to like? No-brainer to take the bigger deal at the better price right?
Take a look at where each round gets you and what story you're telling at each raise. Maybe the first 600k gets you to a nice growing userbase and some promising biz dev possibilities--but most importantly a short history of meeting milestones and a promising chance at hitting your future ones. Sometimes, getting a round of financing is just a matter of timing and being able to say you did what you said you'd do and you're in position to take the next reasonable step. Given those metrics, your next round could be at a significant stepup and your overall dilution across two rounds could be pretty low.
What if that next reasonable milestone realistically requires another 1.5 million on top of the 600k? It's not a ton of money, but had you taken that second "sweet" deal, it would have left you with a bridge to nowhere--halfway to a milestone. That looks worse than if you had accomplished nothing at all--because you will have burned cash and maybe not grown as much as your next product milestone will help you do. It's like that saying goes, "Nothing like numbers to ruin a perfectly good story." At that bridge to nowhere point, you might have to raise a flat or even a down round, giving up more between the two rounds than you would have if you just took the "worse" deal early on.
On top of that, a lot of people forget about what more cash and a higher price signals to the market in terms of your post-money (the valuation someone bought in at plus the cash that came in). If you took that second deal, you'd be signaling to the market that, at the end of this cash, you will not only be a nearly $5 million company, but you believe you'll be even more than that because you should be looking for a stepup. When I see early stage deals where someone takes $4 million, assuming the VC didn't buy a controlling take, I'm thinking about how that company will be able to get a next round valuation in the mid teens--because that's what they'll have to do the next time around. If you took 4 million from a VC, even at a pre of 5, you're looking at trying shop yourself around at a mid-teens pre the next time around--so you sure as hell better have some significant revenue traction or you're going to hit a wall and your current investors will be wiped out.
On top of that, I have to wonder about investors who get deals just by tossing in ridiculous term sheets. If that's the way they get deals, and their portfolio is just full of people who just go after short term pops for big "on paper" money, is that really the kind of group you want to be in? They shouldn't need to win deals like that--and you should immediately raise an eyebrow for someone who tries to win you over on price. That's a little bit like choosing a husband or wife purely on looks. That may pay off the wedding night, but over the long term, I doubt that's a ticket to happiness and a successful marriage. If you wouldn't pick an investor over another one if they were all at the same price, you shouldn't ever pick them. Make no mistake that if you are taking outside money, this is a marriage and you need to pick partners based on quality, not on price.
If you're worried you're not taking in enough money, instead of trying to raise more, how about just trying to do less? Better to have hit the only milestone you were attempting than to get halfway on three. When you're more focused, you tend to spend money more wisely. How many companies do you see that raise a bunch of money and then start playing business model roulette? You might say that gives them room to experiment, but I wonder if maybe it gave them the ability to hire too many scientists and allow too much experimentation.
So instead of going for big money at a big price, perhaps you should be thinking about smaller, incremental steps, at lower prices, so that your next round seems much more palatable to investors.