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The basic goal of every entrepreneur is to provide the company with sufficient capital. For many corporations this might be achieved through revenue, but for others searching for high growth it requires raising enterprise capital.
The amount of capital you would like to raise is a key part of the deal when raising enterprise capital. Investors need to know that you just are raising the right amount of capital for the company. This is often determined by the milestone you promise to achieve with your newly invested funds. Investors want to clearly understand that by investing in your organization, they are going to achieve a specific KPI, reminiscent of a revenue goal, user goal, mental property development goal, or other tangible milestone.
There are specific best practices for determining the amount of funds you wish to raise. First, investors will want to see how achieving the milestone will increase the value of your organization. Second, estimate the cost of achieving this milestone. Finally, determine whether you possibly can raise enough money to cover costs at a valuation that does not result in excessive dilution or makes it difficult to re-raise. While no one knows exactly how much money they need to build their business, these practices can aid you set a realistic fundraising goal.
Step 1: Select milestones achievable in the funding round
To secure investment from VCs, it is important to create a compelling story about how their money might be used to increase the value of your organization. These goals, called “growth milestones,” will vary by company, reminiscent of achieving product-market fit or reaching a money flow breakeven point. When setting these goals, ensure to consider whether they are going to allow you to raise one other round at a valuation twice the current round or achieve sufficient profitability to avoid the need for further VC funding and limit ownership dilution.
Step 2: Determine the burning rate
Once you know the milestone you would like to achieve, you wish to focus on your burn rate (the amount of money you’ll spend) to reach it.
The burn rate is the amount of money a company loses each month after taking into account revenue. For startups without revenue, burn rate is simply money spent every month. The burn rate may help determine the amount needed to be raised, called the working runway. Runway is calculated by dividing your bank balance by your monthly burn rate and multiplying by the number of months you are calculating.
Ideally, you will need to have enough money to keep your enterprise going for at least 12 months, preferably 18-24 months after you raise a round of funding.
Entrepreneurs must set realistic goals for their business and not overestimate what they will achieve in a given period of time. To do this, they need to consider how much significant progress they might realistically make in the next 12 to 24 months and create a list of people they would want to hire to achieve those goals. In this manner, entrepreneurs can make sure that they have a clear plan for using the funds they obtain from investors and can avoid setting unrealistic expectations.
Step 3: How much to collect
As a general rule of thumb, it is best to probably raise at least 20% greater than you estimate you’ll have, but lower than twice as much as you estimate.
While the downsides of not having money are much more serious than the downsides of having too much, it is true that overspending has negative consequences. Taking too much money can set unrealistic expectations for your team, putting you under more pressure to perform well. It also can lead to wasteful spending, creating a culture and habits that ultimately lead to the demise of the company.
Step 4: Determine the quote
Generally speaking, once you choose how much to raise, your valuation might be 4-5 times the amount you raise since most corporations are asked to hand over 20-25% of their stake in any given investment round. The truth is that we cannot give clear guidance on making valuation decisions because there are too many aspects, including market, economic conditions, etc. The best advice is to focus on two things when setting a valuation.
First, in the current market, look at other corporations with similar deals and see what their valuations are; do not forget that enterprise capitalists want to make the best bet possible, so you don’t need to value yourself so high that the risk/reward doesn’t make sense.
Second, set a goal number of shares you would like to sell. Be sure to plot your dilution over the next few rounds. Determine whether you are willing to hand over 15% or 25% of your enterprise at this stage and base your valuation on this amount.