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January 4, 2016 | 5-minute read (804 words)
One of the first questions asked by any entrepreneur is, “How much money do I need for my startup?”
That’s an easy enough question, but the answer isn’t always straightforward and simple. It also varies by business.
To begin, we have put together a list of things for you to consider when first pondering the question of how much money you need to raise:
- You need enough money to turn the corner. In other words, you need enough capital to fund various milestones to help you reach your goals. For example, you need enough money to hire staff, purchase product, or market to potential customers.
- You need enough money for a buffer. This is helpful in the event of a mistake or miscalculation.
Let’s look at how you determine how much money you need.
Make a Plan
To help you determine how much money you will need, you should make a detailed plan and budget. You’ll need to know who and what you need to meet your goals. For example, do you need to buy equipment, hire employees, or purchase services?
You need to know how much time it will take to meet your goals given the answer to the first question regarding the resources needed.
Finally, now you can determine how much capital you need to fund the resources until you meet your goals.
If you can answer these questions, you’ll have an idea of how much money you need to raise. When asking for money, it’s always better to ask for a set amount. Don’t use a wide range or leave the dollar amount open-ended. Be firm in how much you need and have the detailed plan to back it up.
On Being a Unicorn
Just what is a unicorn? It’s a company that reaches a $1 billion valuation or higher determined by private or public investment. A once rare occurrence, there are nearly 140 such unicorns worldwide leaving many to call this year “The Age of Unicorns.”
The term is a bit ironic as a unicorn is a rarity, and unicorns in today’s business world are certainly not rare when you think of companies like Uber and AirBnB.
While being a unicorn sounds great to many startups, and knowing that raising too little is worse than raising too much, it’s good to remember that raising too much can sometimes come with risks since venture capital is expensive.
You’ll find an inevitable tension between raising “just enough” and raising more than enough so you can establish dominance in the market. Let’s take a look at what happens when you raise large amounts of cash – way more than you need. Will it hurt, or will it help you establish a dominant position in the market?
Some critics of unicorns say they represent the next risk bubble. They worry that unprofitable unicorns will create grave financial problems.
Yet, others say unicorns are the place to be. For example, if your startup is one of those unicorns, it will be easier for you to continue to raise capital because you are a more attractive investment.
Lastly, we want to mention that raising too much money has benefits for you personally. If you raise too much money, you are freed from your fundraising role. You have the ability to actually work on your business without having to go back out and ask for more money.
Here are a few more reasons to raise more than you need:
- Extra money gives you a cushion and allows you time to start your business the right way.
- If the extra money increases the value of your company, take the extra funds.
- Imagine that 10 staff members who work for six months without progress will cost you about $500K. Ask for another $500K, and you’ll have enough to weather the growing period.
- If your startup does well, you have immediate access to more cash.
- If your startup isn’t doing well, you have some time to remedy it.
- Each time you go back to raise more money, you will it find it harder to do.
In the end, when asking, “How much money do I need for my startup,” know that the answer isn’t the same for every business or every startup. You can figure out how much you need by making a plan and a budget and sticking to it.
Once you’ve raised the money, do take action to prove the worth of your startup.
If you’re ready to get your startup off the ground, we are here for you. We can help answer your questions and guide you through the process. Outsource your finances, payroll, HR duties and more to us. Contact Escalon today to get started.