An important question that every startup comes across is “how much capital should I raise?” Unfortunately, this question doesn’t have a one-size-fits-all answer. Many entrepreneurs are inclined to ask for as much money as possible as a safety net for the startup. However, this approach could signal greed to investors and jeopardize a startup’s chances of securing the necessary funding. In this blog, we’ll talk about understanding a startup’s financial needs, how to calculate startup runway, and finally, deciding how much to raise.

Deciding How Much to Raise

Understanding Financial Needs

Before approaching investors, it can be important to have a clear understanding of the startup’s financial needs. This involves an honest assessment of the startup’s current situation, projected expenses, and long-term goals. The following are some factors to consider:

1. Runway Calculation

A startup’s runway is the amount of time it can operate before it needs additional funding. To determine how much runway a startup needs, consider the monthly burn rate, which is the amount of money spent every month. A common rule of thumb is to aim for at least 12 to 18 months of runway. This could help give the startup enough time to execute its business plan, demonstrate traction, and prepare for the next round of fundraising.

Example Calculation: If a startup has a monthly burn rate of $50,000, it would need to raise between $600,000 to $900,000 to secure a runway of 12 to 18 months. This calculation can help to create a baseline for the fundraising target.

2. Projecting Future Costs

In addition to current burn rate, a startup should consider any upcoming expenses that may not yet be reflected in the monthly budget. Is it planning to hire additional staff? Will it need to invest in marketing, technology, or infrastructure? Anticipating these costs ahead of time is important. A well-prepared financial forecast can help justify the fundraising needs to potential investors.

3. Growth Objectives

A startup’s funding needs are also influenced by growth objectives. If it has ambitious plans to expand into new markets or develop new products, it may need to raise more capital to support that growth. Consider how much money it will need to achieve specific milestones and how long it will take to reach them.

4. Other Considerations

There also may be costs associated with raising capital that a startup should take into consideration when deciding how much to raise. For example, raising capital through a broker-dealer or funding portal may come with a flat rate fee or percentage of funds raised as compensation.

Additionally, a startup may need to obtain a set of audited or reviewed financials in order to raise capital. The cost of having a CPA to audit or review financial should also be considered.

Finally, if raising through a securities exemption that allows general solicitation (like Regulation Crowdfunding or Regulation A), a startup may choose to hire an external marketing firm or run paid advertisements on social media. These costs should also be considered in the ask.

The Art of Balancing Act

Once a startup has a clearer picture of its financial needs, it might be time to strike a balance. While it can be tempting to inflate the ask, overestimating funding requirements can have negative consequences. Here’s how a startup could approach this balancing act:

1. Avoiding Greed

Investors are often wary of startups that seem overly greedy or unrealistic in their funding requests. Asking for too much can lead to skepticism about the business model and ability to execute. It’s important to communicate a funding need that is justified by financial projections and growth plans.

2. Creating a Clear Narrative

When presenting the funding request, ensure that there is a clear narrative around how the funds will be used. Break down the budget and explain how each dollar will contribute to growth, sustainability, and eventual profitability. Identify areas and the percentage of funds that will go towards hiring, marketing, expansion, and other efforts. This level of detail can not only demonstrate your diligence but may also build credibility with potential investors.

3. Consider the Investor Perspective

Investors are always looking for a return on their investment; they want to know that their money will be used wisely. A well-calculated funding ask reflects an understanding of the business and the market, as well as a commitment to responsible financial management. Always consider the financial ask from the investor’s viewpoint. How will the request align with their expectations and the potential for growth?

Timing is Everything

The timing of the fundraising round can also be important in determining how much capital to raise. If a startup approaching investors too early, it may not have enough traction to justify a significant ask. Conversely, if it waits too long, it risks running out of runway.

1. Market Conditions

Stay informed about market conditions. Economic trends can impact investor sentiment and the amount of capital available in the market. If the economy is doing well, investors may be more willing to part with larger sums. On the flip side, during downturns, it may be wise to lower the ask and focus on only the essential funding.

2. Startup Stage

A startup’s stage also can dictate how much capital it should raise. Early-stage startups may need to keep their asks smaller to build credibility and prove their concept. As a startup progresses through funding rounds (seed, Series A, etc.), it can justify larger asks based on growth, revenue, and customer traction.

The Importance of Flexibility

While a startup should have a target amount in mind, it should also be prepared to adapt based on investor feedback. During fundraising discussions, insights might be uncovered that could lead to adjustments in the ask. Being flexible shows that a startup is responsive to the market and willing to negotiate, which can strengthen the relationship with potential investors.

1. Engage in Conversations

Engage with potential investors before setting a final amount. Their feedback can provide valuable insights into what is considered a reasonable ask within the industry. This engagement can help refine the pitch and align expectations with market realities.

2. Reassess Regularly

As a startup evolves, so will its financial needs. Regular reassessment of capital requirements, runway, and growth objectives can keep a startup aligned with its business goals and help it to be prepared for future funding rounds.

Key Considerations

Depending on which exemption a startup plans to raise capital through, there may be provisions that limit the maximum amount a startup can raise within a 12-month period. Being familiar with these limitations can help tailor the ask in a meaningful way.

Regulation Crowdfunding

When raising under regulation crowdfunding, a startup is limited to a maximum funding amount of $5 million within a 12-month period.

Regulation D

Rules 506(b) and 506(c) do not have maximum fundraising limits, however, if using the exemption under Rule 504 there is a maximum funding limit of $10 million within a 12-month period.

Regulation A

The two tiers of Regulation A have their own maximum fundraising limits. Tier 1 sets a $20 million limit while Tier 2 has a $75 million limit.

Final Thoughts

Determining how much capital to raise can be a nuanced process that requires careful consideration and strategic planning. By understanding the financial needs, striking a balance between ambition and realism, and remaining flexible throughout the process, a startup can feel equipped to help prepare them for raising necessary funds to propel the next phase of growth.

Want to learn more about raising capital for your startup? Check out the following MicroVentures blogs to learn more:

• Fundraising 101: Successful Cold Outreach
• Beyond the Buzzword: How to Know if You’re a Disruptor
• The Art of Storytelling: Effectively Communicating the Vision
• Creating Connections: Communicating with Your New Investors

Are you looking to raise capital for your startup? MicroVentures may be able to help. Apply today to start raising capital with MicroVentures!

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.