2 min read How Much Funding Should You Pursue? This question is the place to start, but you’d be surprised how many startups either, don’t have an answer, or the answer is not well researched.
When I ask entrepreneurs how much they are raising, the automatic answer is $1M. It just seems like the thing to do. And when I ask what they are going to do with it, many seem unsure. Or they provide generalizations like, “We need it for marketing, hiring key personnel, or developing products” (and so on).
The response from investors (myself included) is usually along the lines of, “No S!#t?”
What’s The Plan?
Before pursuing investments, one needs to consider how much to raise and how it will be used. Then, when you go to pitch investors, it should be clear from your financials exactly how you have come up with these specific funding requirements and how you plan to use the money.
Of course, it’s still an educated guess, but having these items researched and detailed in your business plan (and pitch presentation) will build more credibility with the potential investor.
Figuring out how much you need to raise starts with: How much do you need for equipment, inventory, contract services (legal costs, marketing, sales, and more.)? This financial model is a MUST before setting the fundraising amount.
The Magic Number
I often recommend raising as little money as possible before you have customers and or sales because the valuation (how much the investor considers your company worth) will be pretty low. In addition, any money you raise in the beginning will cost a more significant portion of the equity in your company than follow-on investments down the road. In other words, the greater the risk, the greater the equity the investor will require.
It’s also better to raise a lower amount (say $250K) to get the product up and running and sold to a few customers. Of course, you always present a larger round of funding later. Still, at that point, it should be a much better valuation for the entrepreneur–with the product and customer risks mitigated, you don’t have to give away as much equity.
Also, for every $1M you are trying to raise, you’ll spend one year raising it and NOT doing much of anything else on your business. So raising only $250K will reduce the amount of time spent fundraising, allowing you to work on your product, marketing, sales, and team building.
Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://tencapital.group/calculators/
Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: firstname.lastname@example.org