A common challenge that startups may endure is deciding how much capital to raise in a funding round. If it sets the bar too high, it can look greedy. If it sets the bar too low, it might not have enough capital to sustain operations. Where does the balance lie in determining the amount of funding to ask for from investors? In this blog, learn more about deciding how much to raise and some key considerations for startups preparing for their next round of funding.
Deciding How Much to Raise
There isn’t a universal answer to this question. Deciding how much to raise will depend on the industry, the stage of funding, and further, even varies company to company. A good starting spot for startups seeking to answer this question is to conduct a realistic assessment of the startup’s financial needs. This number can form the foundation of how much capital might be appropriate to ask for when conducting a funding round.
Runway Calculation
Calculating current runway can be a good starting spot for deciding how much to raise. Startup runway measures the length of time in months that the company can operate before requiring additional capital. This metric is calculated by current cash reserves divided by the monthly burn rate – the total amount of capital a startup spends in each month. A common amount of time used for maintaining a runway is typically 24-36 months to give ample time to grow revenue, lower costs, and secure new capital, which can be a time consuming process. Having an idea of how much money is needed to maintain the runway can help startups hone in their funding ask.
Projected Future Costs
Runway is calculated based on current or preexisting monthly burn rates. However, future needs should also be considered when deciding how much to raise. For example, planned hires, upcoming market campaigns, technology investments, research and development needs, and market expansion costs should be estimated and considered alongside current financial needs to gain a wholehearted perspective of how much capital may be needed. These future expenses, upgrades, or needs should be able to be justified to investors with examples of how these changing expenses can help the startup achieve its goals.
Growth Objectives and Milestones
Costs needed in order to achieve specific growth objectives and milestones should be considered. Ambitions to enter new markets, develop additional product lines, or scale operations to the next level may require a larger capital infusion. Funding should be mapped to specific, achievable milestones that can be communicated to investors when seeking capital.
Fundraising-Related Costs
The process of raising capital itself can incur expenses that should be considered when deciding how much to raise. Fees to broker-dealers, legal fees, accounting fees for financial statements, and investor marketing for SEC exemptions that allow general solicitation should all be considered and factored into the total raise ask.
Buffer Needs
Finally, unexpected expenses can arise, needs can change, and supplier contracts can increase beyond what was anticipated. Startups should consider adding in a buffer, typically up to ~25%, to help mitigate against the unexpected.
Keep in Mind
Once a startup has a wholehearted view of its financial needs, there are some key considerations to keep in mind when rounding out the financial ask for a funding round.
Avoiding the Perception of Greed
Investors are going to take a look at your funding ask and compare it to your expenses, revenue, future plans, and projected use of funds. They typically want to see a use for every dollar, helping a startup towards growth, profitability, and eventually an exit. Investors may view an overexaggerated ask as poor financial planning, a lack of operational discipline, or an unrealistic view of the market. Startups should be able to justify the amount that they are asking for from investors.
Articulating a Clear Use of Funds
As mentioned, investors typically want to see a use for every dollar in a fundraising ask. Startups should be able to articulate a clear use of funds for how capital will be deployed. A breakdown of percentages can show what funds are going to defined categories such as hiring, product development, sales and marketing, or even cash reserves. Being able to explain what the funds will be used for, all the way down to the details, can demonstrate operational foresight and help build credibility with investors.
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 the right amount of capital to raise can require many considerations, calculations, assumptions, and thorough research. By understanding current needs, projecting future needs, and building out a buffer for the unexpected, a startup can determine how much capital to ask for from investors. However, startups should be able to justify each dollar of the ask to investors, being able to articulate how the capital will be used. By having a disciplined, research-driven approach, startups may have less of a challenge when deciding how much to raise.
Is your startup ready to raise its next round of funding? Apply today to raise capital with MicroVentures!
*****
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.
