How Much Capital Do You Need to Get to Your Next Milestone?
The startup journey is long and arduous. If things go well, you’ll be in a position to increase your startup’s valuation over a number of years. It’s likely that you’ll need to raise more than one round of capital. For these reasons, you should only raise as much capital as you can deploy effectively over a couple of years. Remember, it’s easy to spend money but much harder to use it in a rigorous manner.
A good rule of thumb is to model out what you need to get to your next milestone, for example:
- reaching a certain number of users
- reaching a monthly revenue number, or
- breaking even.
Aim to raise enough capital to help you reach these milestones.
Quick Tip: If you raise too much capital at a low, early stage valuation, you and your co-founders will take excessive dilution, potentially undermining your long-term incentives to grow your startup.
What’s Your Bargaining Position?
Raising capital is a negotiation. First, potential investors must be interested enough in the opportunity to consider investing. But once you’ve crossed this bridge, much of the remaining decision will come down to valuation. As previously mentioned, venture investors are looking for an appropriate risk-adjusted return. It doesn’t make sense for them to invest in early stage startups with over-egged valuations, but often an investor will prioritise ‘getting in’ on a round if they feel a particular startup has great potential.
How Will I Know If I’m In A Strong Negotiating Position?
- multiple investors want in on a round
- your startup is profitable, making closing a round less of an urgent priority
- you have a strong team in place
- your startup is growing rapidly, month on month (i.e. revenue, users etc.)
- you’re in a “hot” industry
Government Grants and Investment
Government departments may also be willing to contribute to your startup. One of the main advantages of these investments is that the department will not usually be looking for anything in return by way of an equity stake.
Example: As an example, Jobs for NSW offers two types of grants for startups. Minimum Viable Product Grants are for startups that are not yet generating revenue but are in a stage of gathering feedback from customers and testing business models. Building Partnership Grants are for startups that are already generating revenue and are looking to accelerate market adoption.
While the money won’t necessarily make or break your startup, it’s relatively risk-free. The only cost to you is the cost of filling out an application form and speaking to the relevant person at the government department.
Aside from startup-specific grants, there are also grants aimed at businesses doing particular types of work and at groups of people, including women and indigenous Australians. Finally, governments may also be willing to act as the guarantor for a loan so that you can raise debt finance.
Case Study: Matt Schiller, CEO of Snappr
Snappr is the Uber of photography, sending pre-vetted professional photographers to you on-demand for any occasion.
Raising investment may be a ‘necessary evil’ if you need additional funds to grow your startup. You want your investment round to be short and sweet (someone who spends three months away from their business putting together a round doesn’t make a very good investment). At Snappr, we have raised two rounds in our short six-month existence and closed both within 14 days, meaning we could stay focused on product and growth.
Pitches and pitch decks aside, find our top six tips below.
Six Top Tips for Raising Capital
- Have one co-founder who dedicates themselves almost full-time to the raise when it’s underway. This means the raise is granted undivided attention while also allowing other co-founders to carry on working undistracted.
- Find investors you connect well with on a personal level. You want people who are on your side for the long term, and who will offer you unwavering support.
- Road-test your terms, then stick to them. Nothing kills investment traction like a founder who is uncertain about such things like the valuation. Provided you go in with something fair and straightforward, a level of confidence and firmness can actually win you respect from investors. The same applies to your business strategy, expansion plans, and everything else you’re pitching – it is better to be confidently wrong than uncertain.
- Set a close date for your round. While this may mean you risk not hitting your target funding threshold, this is outweighed by the risk of a round that meanders on without closing.
- Have your term sheet ready to go. The Handshake Deal Protocol is great, but having the paperwork prepared is the best thing you can do for momentum, and gives your investors the impression that you’re on top of things.
- Invest in people and your network long before you need investment. Our rounds happened quickly, but in hindsight, they were built on trusted relationships over many years. If you think you’ve underinvested in this department, then this Chinese proverb might be good guidance: “The best time to plant a tree was 20 years ago. The second best time is now.”
This article was an extract from LegalVision’s Startup Manual. Download the free 60-page manual featuring 10 case studies from Australia’s leading VCs and startups.
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