Raising Money For Your Startup? Know Why, When, And How Much

Last Updated at: January 09, 2020
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Raising money for your startup_ Know why, when, and how much

Why raise money?

Most startups require some amount of external funding to stay afloat in the initial days. The amount of money required to see a start-up through to profitability is normally well beyond the ability of the founding team and their friends and family to finance. Companies that have quick, widespread growth as an objective will almost always need to burn capital to sustain themselves before turning profitable. While a select few startup companies do successfully bootstrap themselves (i.e. fund themselves without external capital), they are definitely the exception rather than the norm. 

Apart from an infusion of capital allowing startups to sustain themselves and grow, a steady source of money is also almost always a competitive advantage in any given market, in a number of ways: hiring key personnel, marketing, PR and sales. Given this, most startups are usually looking to raise money. And fortunately for these startups, at any given point, in most markets, there are lots of investors hoping to give the right startup their money. The bad news, however, is that the process of fundraising is often long, tedious, complex, and ego-deflating. Despite this, it is a process that almost all companies and founders must go through – but when is the time right to raise funding?

When to raise money?

Venture capitalists and angel investors choose to invest in a business when they hear an idea that is compelling, and when they are convinced that the team of founders can realize their vision. Of course, the opportunity being pursued must also be realistic and sufficiently large enough to interest the investor. When founders have checked all these boxes, they can raise money. 

For some entrepreneurs (a select few), it may be sufficient to have a story and a reputation. For others, however, it will require a captivating idea, a solid product, and some amount of customer adoption or market validation. When all these elements are present, a company is said to have achieved “product-market fit”. Even when a company has reached this point, investors still need persuading. The next step would be to establish unequivocally to the investor that the product is experiencing actual growth, and holds the potential to continue growing in the future. 

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Therefore, entrepreneurs must raise money when they have understood the market opportunity, who their end customer is, and whether they have delivered a product/service that satisfies their customers’ needs and is being adopted at a rapid rate. 

How much to raise?

Ideally, one must raise as much money as they need to attain profitability, so that they’ll never have to raise money again. If this does happen, not only will the entrepreneur find it easier to raise money in the future, they’ll also be able to survive without new funding if the funding ecosystem becomes tight. Having said this, many kinds of start-ups will require a follow on a round (such as those producing hardware). In these cases, the startup’s objective must be to raise as much money as is required to reach their next “fundable” milestone, which could typically be 12 to 18 months later.

An entrepreneur must keep in mind several variables in choosing how much to raise, including the level of progress the amount of money in question will afford, credibility with investors, and dilution. If a startup can manage to give up as little as 10% of the company in the seed round, that is great, but most rounds might require up to 20% dilution (companies should try and avoid more than 25%). In any event, the amount the startup is demanding must be tied to a realistic plan. 

4 Fundraising stages of a startup

It is pertinent to keep in mind that there is a lot of variation in the amount of money raised by early-stage companies, depending on each company’s needs and plans, and so the answer to the question of “how much to raise?” can never effectively be expressed in terms of numbers without learning the specifics of each startup. 

Raising Money For Your Startup? Know Why, When, And How Much

150

Why raise money?

Most startups require some amount of external funding to stay afloat in the initial days. The amount of money required to see a start-up through to profitability is normally well beyond the ability of the founding team and their friends and family to finance. Companies that have quick, widespread growth as an objective will almost always need to burn capital to sustain themselves before turning profitable. While a select few startup companies do successfully bootstrap themselves (i.e. fund themselves without external capital), they are definitely the exception rather than the norm. 

Apart from an infusion of capital allowing startups to sustain themselves and grow, a steady source of money is also almost always a competitive advantage in any given market, in a number of ways: hiring key personnel, marketing, PR and sales. Given this, most startups are usually looking to raise money. And fortunately for these startups, at any given point, in most markets, there are lots of investors hoping to give the right startup their money. The bad news, however, is that the process of fundraising is often long, tedious, complex, and ego-deflating. Despite this, it is a process that almost all companies and founders must go through – but when is the time right to raise funding?

When to raise money?

Venture capitalists and angel investors choose to invest in a business when they hear an idea that is compelling, and when they are convinced that the team of founders can realize their vision. Of course, the opportunity being pursued must also be realistic and sufficiently large enough to interest the investor. When founders have checked all these boxes, they can raise money. 

For some entrepreneurs (a select few), it may be sufficient to have a story and a reputation. For others, however, it will require a captivating idea, a solid product, and some amount of customer adoption or market validation. When all these elements are present, a company is said to have achieved “product-market fit”. Even when a company has reached this point, investors still need persuading. The next step would be to establish unequivocally to the investor that the product is experiencing actual growth, and holds the potential to continue growing in the future. 

Ask a Free Legal advice

Therefore, entrepreneurs must raise money when they have understood the market opportunity, who their end customer is, and whether they have delivered a product/service that satisfies their customers’ needs and is being adopted at a rapid rate. 

How much to raise?

Ideally, one must raise as much money as they need to attain profitability, so that they’ll never have to raise money again. If this does happen, not only will the entrepreneur find it easier to raise money in the future, they’ll also be able to survive without new funding if the funding ecosystem becomes tight. Having said this, many kinds of start-ups will require a follow on a round (such as those producing hardware). In these cases, the startup’s objective must be to raise as much money as is required to reach their next “fundable” milestone, which could typically be 12 to 18 months later.

An entrepreneur must keep in mind several variables in choosing how much to raise, including the level of progress the amount of money in question will afford, credibility with investors, and dilution. If a startup can manage to give up as little as 10% of the company in the seed round, that is great, but most rounds might require up to 20% dilution (companies should try and avoid more than 25%). In any event, the amount the startup is demanding must be tied to a realistic plan. 

4 Fundraising stages of a startup

It is pertinent to keep in mind that there is a lot of variation in the amount of money raised by early-stage companies, depending on each company’s needs and plans, and so the answer to the question of “how much to raise?” can never effectively be expressed in terms of numbers without learning the specifics of each startup. 

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A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.