Defining Your Funding Needs

How much money do you really need?

That’s not an easy question to answer, but it’s one you’ll have to figure out before you pitch to investors.

In fact, investors want to see a very specific number. For example, asking for an amount "somewhere between 5-10 million" is a big indicator that you don’t have a well thought out business plan.

The correct strategy is two-fold,

1) Figure out exactly how much you need.

2) Explain to investors how you arrived at that number and how you will use that capital to fuel company growth.

If you can’t explain how you are going to use the investment capital, you are going to have a tough time raising money.

Another common concern is raising too much or too little startup capital. There are two theories around this.

On one hand, starting a business is always more expensive than you think. Often, there are dozens of costs you haven’t planned for or budgeted for. You will need all the money you can get.

On the other hand, every dollar you raise is going to cost you, either in interest payments or in equity. When you look at fundraising from this perspective, you only want to raise as much as you have to.

How do you find the actual number?

It is a vastly different equation for each and every industry.

The overarching idea is to figure out how much capital you need to cover your costs until revenues can match or outpace them. Usually, a good benchmark is to think about how much financing your company needs for the next 12-18 months.

One thing to keep in mind is that if your business is growing and you are spending investment money wisely, it won’t be as difficult to raise money in the future (in fact, most investors will demand the option to have a preference in future investing rounds over new investors).

Remember to choose a round number. Exact numbers will make your team look too naïve. Professional investors get excited about big ideas – not small ones. So round  to the nearest ten or hundred thousand and convince everyone in the room (including yourself) that it’s justified.  In many cases, investors will suggest you apply a multiple to add “buffer” to your projections to account for extra expenses– they don’t want your stress over cash to be the cause of their investment going bad.