The answer to any complex question is usually “…it depends” and such is the case here. The amount of money you need to request from a banking institution, angel or VC depends on the nature, complexity and size of your business, as well as how quickly you are looking to grow and exit (sell). Each company’s funding needs are as varied and unique as the company itself. Here are a few examples:
ON-LINE SERVICES: Are you a software engineer who is looking to start an online service? Given you have the training and expertise required to create your product, such a business model might require minimal goods, equipment and possibly even minimal staff. Where you would likely need to utilize funding dollars would be in launching a marketing campaign. Spend money to create awareness and buzz about your new business.
RETAIL/WHOLESALE: Are you a clothing designer that dreams of having your clothes sold wholesale to department stores nation-wide? If so, you will need to do some homework on numerous expenditures – cost and legality of producing your product in factories here and abroad, the overall cost of goods and textiles, labor fees, shipment expenses, etc. These costs are in addition to more traditional costs such as salaries and office rental and equipment.
BIOTECHNOLOGY: Are you a scientist, working on a cure for cancer, needing more funds for research? If so, you will need to consider the price of renting lab space and equipment, staff salaries, expensive patent legal costs and FDA research and approvals, etc.
Now you begin to understand that the amount of money you will require to succeed takes careful planning and varies greatly from one company to the next depending on type of business, company size, etc. When it comes to the question of how much money a business should request from investors ReadWriteStart.com (a website with tips for budding entrepreneurs) responds,
THE SHORT ANSWER IS ‘AS MUCH AS YOU NEED’. THE MORE TACTICAL ANSWER IS ‘AS MUCH AS YOU CAN RAISE CHEAPLY’. THE LATTER IS A PRAGMATIC VIEW. RAISE MORE THAN YOU NEED WHEN TIMES ARE GOOD. JUST BECAUSE YOU RAISE, IT DOES NOT MEAN YOU NEED TO SPEND IT – CAPITAL EFFICIENCY IS ALWAYS GOOD!
Once you’ve completed a detailed evaluation of just how much it will cost to launch or grow your existing business, you then need to project these costs over the next few years as your company grows. It may be the case that you need only one round of funding. It is possible you may need a second, once your half way there and perhaps even a third round, if your exit strategy takes a few years. Additionally, you will want to make sure you are working with the angel group or banking institution or VC fund that supports your specific industry. Some funding organizations focus solely on biotech, therefore bringing your budding restaurant chain idea to them would be a waste of time, energy and money.
A good rule of thumb to be aware of when pursing funding, is that in general, angels usually target early-stage startups and invest anywhere from $25,000 to $500,000. Angel investors often provide the seed money to get a business up and running while the founders pursue other sources of financing, such as venture capital. Anything exceeding $500,000 is considered venture capital. Funding from banking institutions varies greatly.
Basically, figuring out how much your company needs from outside funding sources takes a lot of work and highly detailed research. You cannot get around doing your homework. You may have already done much of this research yourself. If so, that’s fantastic and you’re even closer to writing a plan, singling out and contacting the appropriate funding institutions and obtaining your first round of funds! But to most, this task is daunting, and a little help and guidance is necessary to get the ball rolling.
Luckily Boardwalk is here to help. We’ll walk you through this process, step by step, so you can obtain a clear understanding of what it takes to see your brilliant idea come to fruition and wrap your arms around your funding needs. Then we build a cohesive and detailed business plan and PowerPoint presentation, which are essential tools to bring to any investors. Investors want to know you have come to them prepared. They want to see that you understand your business, what it takes to be a success, and how much it will cost to get you there, so they can be reassured investing in you and your idea.