How Much Funding Should You Raise and When?
Whilst this age-old question is too important for a simple answer and considering the constructive tensions at play from both sides of the equation; where entrepreneurs want ownership and control, while investors want a return on their investment or capital. The simple answer is: “raise no more than you need” to reach a specified milestone; product/market fit, for example, or enough to validate your business model.
Regardless, before you embark on this journey, it is worthwhile contemplating on at least these 4 possible answers to how much to raise:
- No more than you need
- As much as you can get
- It doesn’t matter
From a myriad of funding strategies which can be aligned to the specific needs of your business, these answers could be both right AND wrong.
For you to consider which of these might be right for you, let’s elaborate and understand why.
Zero until you’ve thought through things like:
· How to invest it?
· Where it will take you?
· A vision for how it will generate a return.
· Your own ambition and risk profile.
· The expectations and obligations of investing Other People’s Money.
The key here is realistic self-assessment and awareness to be able to provide yourself the required flexibility for the unknowns.
Bottom line: Don’t raise money at all unless you’re ready to make the trade-offs both personally around lifestyle & responsibility and professionally around ownership & control.
“Taking Other People’s Money, is like a drug; easy to try, tough to handle if you don’t know what to expect, and very difficult to get off if you’ve taken too much.”
No more than you need
The most logical approach is to formulate the amount to raise based on the milestones you can achieve to increase the valuation of the business and raise no more than you need to minimise dilution.
In the same breath, however, it is important to understand that investors are looking at the risk they take based on unknowns and discount valuations accordingly.
A practical way, therefore is to minimise friction looking at this from both viewpoints and raise no more than you need:
- To reduce risk and earn an increased valuation for your next fundraising round.
- For the particular stage of your business.
- To reach your next critical milestones.
Bottom line: Understand and be acutely aware where you are and the difference between product-customer fit and product-market fit. Take time on both Minimum Viable Product AND Minimum Viable Segment frameworks.
“Overfunding is like overfilling an out of control car – at best you’ll spin out of control and burn rubber skidding around, and at worst, crash and burn.”
As much as you can get to:
Product-Market fit and or Company-Business Model fit, which often means its time to step it up and raise as much as you can get. Ensuring:
- Repeatability and Scalability in your business model.
- Correctly sizing your market opportunity to attain an unfair advantage.
- You have a long enough cycle to execute and achieve your targets without being distracted.
- You can attract the best talent to fit your team and culture.
- You can manage through the unexpected.
- You can exceed expectations of your team, customers, partners, and investors.
Bottom line: Key Judgements – there is a lot to be considered; the stage at which your business is determines investment attractiveness.
“The best time to raise funding is with all the potential and plenty of proof.”
It doesn’t matter unless you:
- Understand what you are uniquely qualified for.
- Are self-aware to know your limitations.
- Have a clear vision for your market.
- Understand the role your business plays in the value chain.
- Eventually replace funding with revenue, free cash flow, and profits.
Bottom line: Give the time and respect to your business model, because Revenue and Referrals always trump dilutive funding.
“Ultimately, the BEST form of funding is loyal customers repeatedly paying for and praising your products and services.”
A carefully designed business model is the only real tool to provide you with an accurate idea of your funding needs which encapsulates your role in the ecosystem.
Business models are potentially just as disruptive as technology, therefore give enough importance either way and allow enough capital to both test and validate your business model.
Capital planning and Funding Strategies are vital in addressing the original constructive tension between the investee & investor. And meet all stakeholder needs to realize the full potential of your business while building great value and exceeding expectations, .
We have discussed some of the options available to fund your business in the article: Demystifying Funding – A Thought-out Business Funding Strategy, where we do briefly touch on “How much to ask for”.
Also, worth a read, if you are evaluating your funding options, the required tools and assets to prepare as you approach the different avenues, are:
a. Getting Investment Ready and
If you are unsure of where to start but would like to explore how to put a clear funding strategy in place in place, seek help from experts to help put a framework together.
I am keen to understand the challenges small businesses are facing in adopting measures proven to increase value and address the “it’s easy for you to ………” comments.
The difference really could be realizing your vision and your life’s dream.
Make the commitment, receive the help you need and reach your goals now.
Ketan Shah is a Business Advisor, Mentor, Coach, Management Consultant and Entrepreneur with over 15 years of experience in Strategy Planning, Portfolio Management, Performance Measurement & Management, Project Management, Business Process Improvement and Private Equity.
He is especially passionate about Business Optimisation and Leadership through Strategy, Structure & Systems; supporting the development and Implementation for transformation, turn around, growth, start-up and commercialisation Initiatives.
Ketan is the creator of BOSS the Business Optimisation Strategy Structure Model® and BOSSS the Business Optimisation Strategies, Structures & Systems Program® from his “in the trenches”(and sometimes “by the skin of teeth” risky) endeavors and experiences.
Moksh Pty Ltd is a Strategic Business Advisory, Management Consulting, Investment & Funding Partner Supporting Turn Around, Growth, Start-Up & Commercialisation Initiatives.