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Most businesses need to raise external funding from investors to take their company to the next level. An early-stage startup will want to access funds to help further validate its business proposition.
A more established business that already has traction might need funding to help with the growth. No matter what stage your business is in, if you are seeking investment, it is critical that you need to determine how much funding you need.
Problems with Not Raising Enough
It is important that you do not incorrectly assess your funding need because it can have serious repercussions on your business. It will lead to inadequate validation of your proposition or executing growth initiatives that do not help.
When you raise too little funding, the company will run out of money and all growth comes to a stop. There will be limited options and you are in an extremely poor negotiation position in front of the a few investors who might still be interested. If you are fortunate enough, you can bet the investment terms who will be so onerous that you will be left wondering what you are fighting for.
Raising funding is time-consuming, distracting, and expensive. The consequences of getting it wrong the first time around is that you might not have a second chance.
Problems with Raising Too Much
Raising more funds than what you need is not the right approach to take. Raising too low of funds is risky and raising too much funding is also risky.
The issue with raising too much is a technical one. Any investor will put their valuation on your business based on a number of factors, including looking at important metrics for your business, patents, or assets. Raising too much money will cause the valuation to increase.
A high valuation for your business leads to greater expectations. Receiving more funding means more due diligence and having to accept higher control provisions from investors. An investor expects you to create value with every dollar they put into the business. This puts more pressure on you to identify additional value sources. A greater step change would be expected from levels of performance the business has been demonstrating to date.
Another problem with having too much funding is the feeling of needing to spend it. You might hire more employees than you need, become inefficient with operations, or move to bigger offices. The temptation to spend extra money that you have can result in burning through too much money and can even make it difficult for you to raise funding later in the future.
Before you begin fundraising, it is important to set out what parameters are for things like valuation and terms. The only time you should raise more than what you need is if you get it on terms that sit within your parameters.
Asses How Much You Need
You should get an accurate view of the current cash in order to correctly estimate how much funding your business needs. After that, based on the history of performance, assess what your monthly cash burn is.
You will have a better grasp of your business by understanding your month-on month cash burn and identifying the variables that affect this. You will also have a better understanding of the levers you can pull to extend your runway when things get tight.
The next step is to map out key milestones for your business over the next 12 to 24 months. Exactly what the milestones are will depend on your business. The milestone just needs to be tangible and quantifiable. It needs to demonstrate how to will create value in your business.
Review your forecast projections with these milestones factored in to understand your cash need in a certain period like, 24 months. Add this to additional costs it will take you to run your business over time.
The Bottom Line
Investors appreciate entrepreneurs that handle their money responsibly so they will appreciate the approach you have taken to safeguard their interest. Their key concern is in you maximizing value through any incremental increase in investment. If you can talk in these terms to justify your funding and support this with the responsible approach you have taken above, investors are more likely to be convinced. At the end of the day, you need to assess and balance the right funding need so you do not raise too much or too little.
