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How Much Funding to Raise and When?

by | Business Insights & Resources

 

Whilst this age-old question is too important for a simple answer. Especially 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. 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. It is worthwhile contemplating on at least these 4 possible answers to how much to raise:
  1. Zero
  2. No more than you need
  3. As much as you can get
  4. It doesn’t matter
These answers could be both right AND wrong. From a myriad of funding strategies which align to the specific needs of your business,
 
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. An awareness to be able to provide yourself the flexibility for the unknowns.
 
Bottom line: Don’t raise money at all unless you’re ready to make the trade-offs. Both personal and professional. Around lifestyle, responsibility, 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 plan 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, it is important to understand that investors are looking at the risk they take. Based on unknowns and discount valuations.
 
So, a practical way, 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 aware of where you are. The difference between solution-product 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 supported by a sound Business Model, which often means its time to step it up. 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 consider. 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.”

In Parting:

A well designed business model is the only real tool to provide you with an accurate idea of your funding needs. It encapsulates your role in the ecosystem.
 
Business models are as disruptive as technology. So give enough importance to both. And allow enough capital to both test and validate your business model.
 
Capital planning and Funding Strategies address the original constructive tension. Between the investee & investor. It must endevour to realize the full potential of your business. Meet stakeholder needs while building great value and exceeding expectations.
 
The article, Demystifying Funding – A Thought-out Business Funding Strategy, further discusses funding options. It touches on “How much to ask for”.
 
If you are evaluating your funding options and the required tools and assets to prepare read:

a.     Getting Investment Ready and

b.     The 2 Most Valuable Documents as you Approach Investors for Funding

Seek help from experts to help put a framework together, if you are unsure of where to start. And would like to put a clear funding strategy in place.

 

I am always keen to understand the challenges businesses are facing in adopting measures to increase value – so, please do connect.

Ketan Shah is a Strategic Business Design expert, advisor, management consultant and entrepreneur. Especially passionate about Business Strategy, Structures and Systems, he has designed and developed the SSS Business Design® framework for startup entrepreneurs and established business owners looking to make business decisions with clarity, confidence & control. Pursue opportunities, manage profitable growth and maintain high performance. Without the overwhelm, stress and frustration.

Moksh Pty Ltd is a Strategic Business Design, Advisory, Management Consulting, Capital Solutions, Investment & Funding Partner supporting Start Up, Commercialisation, Transformation, Turn Around, Growth and Initiatives.

 

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