How Much Capital Do You Need?
A lot of startup founders ask investors for money without understanding how much they really need. The reason is simple, they did not determine exactly what they wanted to use the money for and how much they really needed. They just knew they needed money.
Before going to meet with an investor, you should ask yourself these questions and write down your answer:
- How is your company going to make money?
- How are you going to acquire and retain customers?
- What is your sales cycle?
- How much up-front investment is required?
- How much will your day-to-day expenses be?
- How long will it take before you start generating revenue?
- What are your profit margins for each product line?
- Do customers pay you upfront or pay on invoice say within 30, 60 or 90 days?
With some simple maths, you should be able to come up with answers to these questions.,
Putting these answers into a spreadsheet and creating projections will allow you to determine the amount of capital you need from investors.
You need to provide potential investors with your Use of Funds, that is the budget for the money you raise from investors. This is often included in your investor presentations and pitch deck.
The Use of funds includes a list of items with the corresponding funding amount. Below is an example of a Use of Funds:
Two Product Development Staff: $300,000
Marketing and Promotions: $500,000
Expand production: $1,000,000
Hire Team Leader: $150,000
Distribution Agreements: $50,000
Conduct product trial in USA: $250,000
Undercapitalisation is a risk to your business. Ensure you are raising enough capital to reach your goals and milestones. Generally, it is better to narrow the activity of the Use of Funds and concentrate on achieving fewer milestones rather than spreading yourself too thin.
If you allocate $500,000 for marketing maybe concentrate on securing as many customers in a targeted region or market segment rather than chase too many markets and segments all at once.
For instance, if the Australian market is big enough for you to make a healthy profit then you should first focus on this market before trying to expand in the USA. Concentrating your $500,000 marketing activity in Australia where you have local knowledge makes a lot more sense than trying to spend $500,000 across 52 states with 325 Million people.
Once you are profitable in Australia, you can afford to use some of your profits and/or investors’ funds in a new capital raise to expand into new markets.
It is important to think about these scenarios and document your strategy. These are the types of conversations you will have with investors and if they can see that you have a highly targeted and focused strategy for building your business, you will most likely impress them enough to attract their funding.
In this FREE report, we reveal the best way to find investors, the best way to pitch, the funding process, and our top 10 tips for raising capital.