How Much Should a Start-up Raise for a Round of Funding? Here’s a 7-step System.
Investors value outcomes, not activities.
For start-up founders, raising money is a difficult and full-time job; but everyone knows how essential it is for launching a successful enterprise.
Skillfully and accurately knowing how much to raise for a round of funding is another issue entirely. While some founders might have a fair idea of the amount needed, others may not understand the critical elements required to go into their calculations in order to arrive at a figure. There are a variety of factors that start-up founders have to consider when making this decision and, unfortunately, there is no one-size-fits-all answer to this.
According to Eunice Ajim, “Investors value outcomes, not activities. It’s a mindset shift that [founders] need to make.” She is a tech entrepreneur, investor and founding partner of Ajim Capital, an early-stage fund investing in pre-seed and seed-stage companies that focuses on using technology to fill significant economic and infrastructure gaps for consumers and enterprises across Sub-Saharan Africa,
Below is her proposed seven-step system to determine just how much a start-up founder should raise for a round of funding.
- Determine your runway. How much do you need to operate for 12–18 months? Factor in the cost of:
• Your team salaries
• Your rent and utilities
• Your production costs
• Your marketing and sales expenses
• Your contingencies
- Determine your milestones. What key milestones do you need to hit to become successful?
• Launching an MVP
• Reaching 1,000 customers or more
• Getting a patent
• Signing a partnership agreement
- Determine the cost of your milestones. What resources do you require to reach your milestones? Put into consideration the cost of:
• Development and design of work
• Marketing and advertising costs
• Legal and regulatory expenses
• Staffing and resource allocations
- Prioritise your milestones. What are the most important milestones that you want to achieve?
• Which milestones would likely lead to revenue generation?
• Which milestones are necessary for scalability?
- Determine how much funding is necessary for each milestone. Allocate the required resources for each milestone. Factor in the cost of:
• Hiring additional staff
• Developing new technologies
• Marketing and advertising
• Legal and regulatory expenses
- Consider your valuation. How much equity are you willing to give up?
• Are you willing to accept a lower valuation for more funding?
• Are you willing to raise less money for less equity?
- Communicate your plan. Present your funding plan to investors.
• Show them how the funding will lead to specific milestones.
• Highlight the potential for generating significant revenue.
• Demonstrate the expertise of your team.
In the end, she cautions, “Remember, investors want to see outcomes and a clear plan for success. Use this system to create a realistic funding goal and communicate it effectively.”
Or as TechCrunch succinctly answers: Enough to hit the milestones to raise your next round of funding.
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