Many startup founders are really good at starting their business models and working with others to get beyond the prototype phase. They even have great investor connections and networking skills to take their business to the next level. However, often they get stuck in figuring out how much capital they need to raise. This article isn’t about valuation (although they are connected) but rather figuring out how much money you need at this stage to get you to the next growth level. Here are 4 ways for startup founders to figure out how much capital they need to raise.
1 – Do the math
Most startup founders don’t naturally think of this as the first methodology, but it’s the most straightforward. Figuring out how much money you need to either take your business to a level where you don’t need additional capital or to a growth stage where you can raise additional capital at a higher valuation is a critical method. Investors will ask you anyway so it’s important for you to figure it out. For example, if a business was to raise $1.0M it may be very exciting to have this in the bank, but your job as a founder is to know how to spend this money, grow your business and make your investors money! So spend the time do the math and figure out salaries, overhead and other important costs which will ultimately translate into your burn rate, which is the math to give you the amount of capital you need to raise.
2 – Take a look at your industry
Industry comparables are another great source of information. Often times a tool used by investment bankers, industry averages provides for a pretty good indicator for how much capital you’ll need. If there is information that startups in your industry raise $2.0M for the average Series A, it’s probably not normal that you’ll be raising $20.0M for your Series A. Every type of business has different capital requirements and industry information is great place to start.
3 – Where are you in your business?
Every great business idea probably needs millions of dollars to succeed. If you think that the first investment of $100,000 will make you into a $1.0B startup, you are likely to be sorely mistaken. In the same vein, it’s important to identify where you are in the startup lifecycle in order to determine how much capital you need to raise. Raising money to develop a prototype will be different (and likely much more expensive) than trying to raise capital when you are generating revenue and have a significant customer base. Out of the door an idea is worth very little and should require much more nominal sums of money as compared to a company that is raising capital to scale internationally. Know where you are and base your numbers based on that.
4 – Ask your investors
Investors are typically not only the wallets, but also great sources of information. While you should have done your homework, always talk to your investors about the capital you are raising. It’s highly likely that potential investors are going to provide feedback (either too much or too little) and they probably have more experience than you do through other investments or businesses they have run to give you some valuable advice on how much capital to raise. You may think marketing efforts will cost much less than someone who has done it before. Don’t go in blind, but don’t be afraid to ask for help from your investors. They are in the same boat as you and want you to succeed!
There’s numerous ways for startups to figure out how much capital to raise, but it’s most certainly an art as it is a science. It’s a moving target and is heavily based on expectations and needs while also being intricately tied into the concept of valuation. Take some time to really think about it because it’s probably one of the most important numbers you’ll figure out!