This common is almost as common a question as the classic, “Are we there yet?” posed by children on road trips. Because every startup needs capital to operate with, but how much? That question leads to several more, but the reality of the situation is: “It depends.”
There are three primary things to be considered before you even ask the question:
- Stage: What stage is your startup in? What round of funding is this?
- Track record: This is a two-parter: What is your record as an entrepreneur? Is this your first startup or do you have a record of successes under your belt? Part two: what’s the track record for your startup? What have you done with the money you already raised? Did you meet previous benchmarks?
- Industry Sector: How is your industry as a whole performing right now? What are other startups in your industry raising?
But before we stop there, let’s look a little closer at what numbers could look like in a variety of scenarios.
Friends and Family (F & F)
Early research and development? Proof of concept? Unless you already have a proven track record in your industry and as an entrepreneur, most VCs won’t touch these unless you find an angel investor with experience in what you are doing who can see beyond the development stage.
This would be a hard stage to raise funding in anyway. Most of the time your concept is so young, you have no idea what costs might be going forward, let alone what you would need for full R & D or operating costs for the next six to twelve months. Just understand if you can’t put a number on something, neither can a potential investor. And they love numbers as much as they despise uncertainty.
Seed/Early Funding (25K-3 Million)
That’s a wide range, and for good reason. Because how much you need at this stage depends on what you are raising. A software project is pretty easy, relatively speaking, to estimate costs for. Most of your money will be spent in labor, which is pretty predictable, travel, and testing costs.
However, if you are making physical hardware, there are many more variables to consider. Tools, materials, shipping, and even brokers can all vary significantly in cost. When you think you know how much something will cost, you will often be advised to double or triple that cost estimate. Because you will be wrong.
Let’s say you have a lot of experience in an area. Even then you need to tack six months of costs onto what you expect to spend. If you don’t spend all the capital you raised, you will still be fine. If you have to go back to ask for more because you’ve run out, not only will you have egg on your face and some humble pie to dig into, but you will also have lost the trust of your investors.
You need their confidence. Because once you have a prototype, you will need to set goals and benchmarks you need to reach, probably in several stages, before you can take your hardware to market. You’ll need funding for that as well.
Because even when you get to market, you won’t start out with a positive cashflow. It takes time to get paid as sales build, so you’ll still need a runway of capital to get your company up and flying. That includes payroll, utilities, and even hiring new talent.
You need to know your industry, your product, and your projections inside and out. Because how much you need to raise will depend on how much you need to operate on a monthly basis until you are profitable. How much you can raise will depend on your competence in communicating those needs to investors.
Series A/B (3 million to 20 million)
This is a broad window, but for the same reasons that seed funding is defined with such a broad window. Raising capital at this point is usually easier, provided you have some key things:
- Identifiable Progress: You have an MVP and are moving beyond it.
- Traction: There is positive reaction in your industry and space to your product.
- Revenue: You have some sales and revenue, and they are on an upward trend. You may not be profitable yet, but you have proven the likelihood that you will be.
Again, it is important to ask for six months more than you will need. Before you set a number, understand all of your expenses.
- Product Development: What will it cost to produce your next product and beyond.
- Patents: Think of the cost associated with registration and the accompanying documentation.
- Geographic Expansion: New locations or selling on a national and international level.
- Compliance Expenses: What will it cost to comply with regulations in your area as you continue to develop and expand.
Whenever anyone asks how much funding they should raise, it’s an impossible question to answer. Nor should anyone else be able to answer but you. It’s your company, your product, your path to profitability. But you should know what questions to ask to figure out how much funding you need.
It’s going to take digging, research, and work to come up with the right number, and even then, you could be wrong. But if you look understand the stage where you are, honestly examine your track record, and have surveyed your industry sector, you should be able to come up with a reasonable answer.
Whether or not you get what you ask for will depend on how well you can present your case and your numbers. Aim to wow your potential investors by knowing how you came to your figures and your diligence will help set you apart.