Are you at the point where you are thinking about how to figure out how much capital to raise?
Knowing how much you need and should ask for in a fundraising round is a critical part of being a founder. There is both art and science to it. Though go too far off base and you could be caught out, with serious repercussions.
Your ask and ability to explain your reasoning is going to be one of the most important factors when you are out there fundraising and pitching investors. It isn’t about the numbers as much as what it reveals about your knowledge, experience and how much time and effort you’ve invested in learning and consulting fundraising experts on this key element.
As with most other things you’ll buy and sell, comparables can play a big role.
One of the things you absolutely must know and should demonstrate in your pitch deck is how much other startups in your space have been raising at this stage recently.
For example, if one of your competitors raised $9M in a Seed round four months ago, that can be a good starting point. You may be able to justify a substantially bigger raise. Though if you are asking for significantly less, that can be a red flag. It will at least create more questions in your prospective investors’ minds. You don’t need any more of those. Are you not as good? Why do you think you are worthless than them?
Look at the three to five most comparable and most recent raises. You may add and deduct based on a few factors to get a sense of the range you should be in. Just don’t undersell yourself.
How much runway do you need to survive until another fundraising round may be possible?
Y Combinator offers a super simple (probably over-simplified) formula for raising your first round. That is multiplying the cost of 5 engineers by the number of months of funding you are planning to cover. So, if you’ll need 5 engineers, at a cost of $15,000 per month, before raising a new round 18 months down the road, you’ll need $1.35M.
Typically, you’ll be raising enough to get you through 12 to 18 months, before raising another round.
However, the coronavirus pandemic could be significantly changing that. You may need to reevaluate and raise more now, with the expectation it could be much longer before you’ll bring more capital in on palatable terms.
Cost Of The Next Milestone
The purpose of a fundraising round is to get you to the next major milestone in your business. How much will that cost?
Besides paying your team for long enough to get results, are there hard costs associated with achieving that milestone? Like producing prototypes, manufacturing, materials, equipment, marketing, and just time to make it work?
Whether it is proving you can actually make what you want to, achieving product-market fit or scaling to the next level, what will it really cost to get you to the point where you are eligible to raise or exit at the next milestone?
Funding & Capital Market Trends
If you are wondering how to figure out how much capital to raise remember that things do change. They are always changing. Do not underestimate this.
This is specifically true when it comes to the economy and financial markets. Fortunately, we have more data than ever before. We can see the patterns in advance, and play the short and long game much better.
Capital markets go through significant phases. In recent years they’ve been throwing money at any startup that pops their head up with a pitch deck. They’ve been fueling a hyperactive M&A market and the IPO market.
While it is believed that funds still have enormous amounts of capital to deploy, and many say they are looking at the big picture and are standing by their startups to keep helping them through any current crises and volatility, it is likely we’ll see some changes in the coronavirus pandemic and its aftermath.
Most won’t say they believe a new downturn could be anywhere near as bad as the Great Recession of 2008. Though, that doesn’t mean they won’t start to write smaller checks, be more conservative in valuations, tougher in due diligence, and prefer startups with cash flow and profitability.
In this scenario, there will be a lot more startups and funds chasing less and harder to get capital on rougher terms.
This will change again. If not in months, at least in a few years.
The key is raising enough money to ride out any freeze. This is one of those times when it may be wiser to raise more than you need, in order to ensure your ability to survive and grow and take advantage of opportunities.
Add A Financial Cushion To Your Projections
If you are a new entrepreneur, you’ll quickly find out that everything costs more than you thought, and takes longer to get done than you planned.
That’s okay. Provided you’ve got the extra money to fall back on.
Some have suggested that when thinking about how to figure out how much capital to raise you need to add as much as 50% on top of your raise to ensure you are covered for these issues. So, if your math so far has brought you to a $1M Seed round figure, you really want to raise at least $1.5M.
Positioning Your Ask
Note that the amount you think you need isn’t necessarily the same as your ask. That is key when thinking how to figure out how much capital to raise.
If you want to get traction quickly and to have an oversubscribed round, you may want to start low, and add on to that.
There may also be scenarios in which you really want to land larger investors and partners and will need to expand your ask to be a good fit for the size of checks they write.
Remember that storytelling plays a key role in fundraising and you will need capital to scale things up. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
ACCESS THE PITCH DECK TEMPLATE