I heard this last week at the Wisconsin Entrepreneur's Conference. We've all heard this before, "You should raise more than you need while you can," said the speaker. "It will be easier than it will be later if things don't go as well as planned."
"Well," I asked, "how exactly do you do that?"
On the surface, it seems improbable that a plan that suggests you would like a $500,000 "cushion" in case you miss projections or overspend is going to inspire much confidence. And, the more this "fact" gets uncovered during the investment give and take, the less likely it is to sit well with investors. That may create a downward spiral of interested people, and things can go south from there.
Another alternative is to pad the projections. That's probably not a good idea, especially if the investor begins to try and understand the business model (as opposed to the plan) and deconstruct the numbers. If they don't add up, the entrepreneur is right back to the same place.
Does this idea ever work? Well, yes. If the entrepreneur has what is perceived by investors to be a rock solid plan, (and passes all of the other investor's diligence) then investors may urge the entrepreneur to take more money than she needs so that the investors can "participate" more. If the enthusiasm is high enough, this will generate more investment. Of course, if the entrepreneur really doesn't need the money, it will also generate more dilution and a smaller return for all involved.
At the extreme, this can be bad, of course. Nothing would be worse than to have that extra $500,000 sitting in the bank and never put to work, since the company will eventually wind up paying whopping returns (if successful) for money that never did anything but earn a money market return.
But, in less extreme circumstances, it provides resources for the aforementioned great plan and entrepreneur to take advantage of growth opportunities more quickly and more fully.