In my experience, less than you think. Startups tend to look in all the wrong directions to establish how much capital they need to take in, instead of actually looking at what they need in order to accomplish a clearly defined mission, which is what really matters.
In this post, I want to touch upon some of the main fallacies I experience when talking to startups and give you a simple process to establish what you actually need and what would be best to have and how to get closer to the latter.
What you think you need to think about
- How much have my competitors raised?
- How much is an average xyz-round?
- How much could we imagine spending in the next 18 months?
This is all completely irrelevant to efficiently reaching the goals you’ve set to make your business successful. Even worse, I quite often experience founders saying things along the lines of:
Let’s set our goal a bit higher than what we actually need, that way, if we don’t raise the full amount, we’ll still be okay.
This is an understandable logic, but completely misguided nonetheless. If you come to an intelligent investor with bloated budgets, she will see straight through it, interpreting it as either–in the best case–incompetence, and–in the worst–as you trying to scam out money of your investors.
What you actually need to think about
Instead, here’s the steps to go through to determine how much you need to raise:
- Make a very, very thought-through and thorough plan for your company defining which goals you need to achieve.
- Make a realistic budget for how much resources and time you will need as a minimum to attain those goals.
- Make a realistic budget of what you could do with extra resources in the same amount of time as in the budget above.
- Show this to everyone who can challenge it.
There’s one night that stands out as the hardest night in all my time as an entrepreneur–without comparison (Not even the night I put my fist through a glass door can compete). It’s quite naturally the night we realise that we probably won’t make it, under the worst imaginable circumstances.
First, a little backstory
The higher you fly, the deeper you fall. Our hubris had been roughly three months earlier, when we went on the Danish version of Shark Tank/Dragons Den, pitching our company and asking for DKK 300k (≈$46k). We had done our homework, and delivered a pitch that was, in my humble opinion, fucking awesome. We sold our vision, and we had the answers. Several of the high profile investors were interested, and we ended up walking out of there with a interest of a million Kroner (≈$150k. — More than three times of what we asked for.
This was the most amazing day. As anyone who’s walked away from a really, really great investor meeting will know, you feel like you’re flying. On top of this, we were going to get some serious PR from this, as the show was extremely popular.
Of course, when you get a commitment while recording a TV-show, that’s only a commitment to start a due diligence, and we were in for a rough one. As first time founders, dealing with some of the world’s best investors isn’t easy. They were fair, honest, and to the point, but there were clear problems in our startup that made them weary of putting down the full investment. On a call with the investors, one of them said it very, beautifully:
Your team is awesome, your product sucks
It was true. And we had to fix it. We had already tried to bring in more manpower, but being non-technical, we struggled to find the right guys for the job.
In the end, we set a goal with our investors: By the time the show aired, we needed to have our product improved on range of areas, otherwise they would pull their investment.
We didn’t. (more…)