For any entrepreneur, the answer to this is very formulaic. The first task is to understand what will be the cost to start your business in your geographic region, in your industry, or in your marketing niche. The amount that you calculate based on your research should be enough to last one year of company’s operations. The amount of capital you raise should be enough for the following-
- Fund the milestones you think are necessary to reach a significant point in the value of your business. Achieving these milestones has a bigger picture attached to it, more of an insight of the business potential and demonstrates the leadership skills of the team.
- The milestones of a startup are an important aspect of getting the right amount of funds. It is mostly a yearly plan of action made in advance that gets you the necessary funding. The investor would invest the amount that is required for your startup to survive the first year operations. An investor might not know what the exact figure your business will need to grow in the next milestone, rather, the investor will rely on your ability to communicate the financial plan to make a decision. It will also depict how well you know your cash needs and your company’s milestones.
A lot is at stake when defining milestones, which is a quantifiable achievement in terms of the product or team expansion.
Let’s take a hypothetical example – As a startup founder, the first question that comes to your mind would be whether to go for funding or to go bootstrapped. Having done a research on both the options, I decided to go for bootstrapping. Having heard the tales of many experienced startup founders, I realised that going for bootstrapping would give you the luxury of freedom which is less likely in a funded startup.Going by this option, co founders and I decided to put enough funds together to start the business.At this point, you have done your research, feasibility test, market research, competitive and risk analysis. The results are positive and you are certain to go ahead with the idea.
According to a study, the minimum budget required to build an MVP for both iOS and Android will cost a minimum of 15000$. The timeline for building an MVP is somewhere between 3-4 months.
The monthly cash burn comes out to be 3000$ which includes basic needs of the company for a four member team.
One thing that I would like to tell all startup owners is the problem of ‘Over Speculation’. People over analyse and over value their idea which acts as a barrier in the success of the company even before it has started.The whole idea behind a startup is to experiment or test your idea in the market. And, it can be done with a small amount as well considering the assumptions defined above. Post the launch of the MVP comes the Angel Investment.
At this point, the startup is looking for investors to go the extra mile where the milestones are very important. The investor will be more focused on the core team which will drive the product. The funding will depend more on their belief and skills than the product. The product is already a success so the only thing that will take it to the next level is the person behind the idea. It is a major test for the entrepreneur.
Hypothetical example of financial milestones-
Month 4- Launch MVP
Month 6- Building the product
Month 8- Beta testing
Month 12- Launch product
Funding depends on how well you are able to explain each milestone to the investor. Your understanding of your own business and the research to back it up will define the amount of funding you will get as opposed to what you have asked. It may also be the case that you haven’t considered all aspects of cash required for your startup.
Hence, it is extremely important to know your monthly cash burn as it is the key figure to know before you go forward with investment.
It is usually said that ‘take as much as you can’ which may hold true for a lot of situations but has its drawbacks as well. With a large amount of money comes a few problems like-
- With more money comes more investment terms and due diligence. The more the money, the more the control provisions of the investor over your business.
- Overfunding a startup may at some point lead to financial laxity, lack of focus and overspending by the management team.
It is good to build buffer for the mistakes that you might make in your execution. An experienced investor may have seen many startups like yours and know that there will be certain mistakes which will require more cash. Hence, the investor will include the buffer amount in the final investment that will be offered which may be more than the money estimated by the founder.
Let’s suppose the exact calculation based on the milestones comes out to be 100K after the MVP version has successfully been launched and the investor is willing to give 250K keeping in mind the buffer. This large amount that the investor has decided will affect the company’s valuation. Too much will inflate the company’s value that it sits on so, the investor will not give you excessive buffer as the company shouldn’t be overpriced. On the other hand, company shouldn’t be underfunded because if it doesn’t have enough money to cross its milestones it may not be able to raise more funding. The company may have a problem in such a scenario.
In conclusion, raise as much as you can but first understand your monthly cash burn and the cash you will realistically require to achieve the timelines. The second major reason why startups fail is that they ‘ran out of cash’. Hence it is important to know your monthly cash burn in order to grow.
Raise as much money as you would need once you have achieved your milestones for the first year and before you go for the second round of funding. Add at least funds worth 6 months over and above what you require for your present timeline.