How to Evaluate How Much Capital to Raise

Determining the right amount of capital to raise involves careful planning to ensure you have enough runway to reach your next major milestones while minimizing unnecessary dilution. Here’s a step-by-step guide to help you figure out how much funding you should aim to raise:

1. Identify Key Milestones for Your Business

Objective: Define what you aim to achieve with the funding, as investors want to know how their capital will help you grow.

Key Milestone Examples:

• Product Development: Completing an MVP, beta version, or full product launch.

• Customer Acquisition: Reaching a specific number of active users or revenue threshold.

• Market Expansion: Entering a new geographic market or industry.

• Profitability: Achieving break-even or sustainable cash flow.

Example: If you’re in the pre-seed stage, your milestone might be to launch an MVP and acquire 1,000 users within 12 months. For a seed stage, it might be reaching $50K in Monthly Recurring Revenue (MRR).

2. Calculate Your Runway Needs Based on Milestones

Objective: Estimate how much time you’ll need to reach your milestones and ensure your funding covers that period.

Typical Runway Lengths:

• Pre-Seed / Seed Stage: 12-18 months of runway, focusing on building the product and initial user acquisition.

• Series A: 18-24 months of runway, focusing on scaling user acquisition, expanding the team, and improving product-market fit.

Calculation:

1. Determine your monthly burn rate (the amount you’ll spend monthly).

2. Multiply your burn rate by the number of months you’ll need to reach your milestone.

Example: If your monthly burn rate is $30,000 and you need 18 months of runway, you’ll need $540,000 to cover expenses until your next milestone.

3. Forecast Your Expenses (Burn Rate)

Objective: Build a detailed breakdown of monthly expenses to calculate how much you’ll spend over your projected runway.

Expense Categories to Consider:

• Salaries and Hiring: Factor in current team costs, planned hires, and any salary increases.

• Product Development: Costs for software tools, hosting, cloud services, and R&D.

• Sales and Marketing: Budget for ad spend, customer acquisition, PR, and branding.

• General & Administrative (G&A): Office rent, accounting, legal, and other administrative costs.

Example Calculation: If your total monthly expenses are $40,000 and you’re aiming for a 12-month runway, you’ll need to raise at least $480,000 to cover your burn rate.

4. Factor in a Buffer for Unexpected Costs

Objective: Include a cushion (usually 10-20%) to cover unexpected expenses or delays.

Common Unexpected Costs:

• Slower-than-expected customer acquisition, leading to increased marketing costs.

• Additional R&D or technology upgrades.

• Legal fees, regulatory changes, or unforeseen administrative costs.

Example: If you calculate $500,000 as the necessary amount, adding a 20% buffer would bring your target raise to $600,000.

5. Align with Your Valuation and Dilution Preferences

Objective: Balance your funding needs with the potential dilution so you retain a fair ownership percentage post-funding.

Key Considerations:

• Target Dilution Percentage: For early stages, founders typically aim for 15-25% equity dilution per round.

• Post-Money Valuation: Estimate your post-money valuation based on market norms and investor expectations.

  • Formula: Post-Money Valuation = Amount Raised / Percentage of Equity Offered

Example: If you’re comfortable giving up 20% equity and estimate a post-money valuation of $3M, you should aim to raise $600,000.

6. Estimate Revenue and Cash Flow (If Applicable)

Objective: If you have existing revenue or expect cash inflows, calculate how this affects your runway and capital needs.

Steps:

• Project Monthly Revenue: Estimate how much revenue you’ll bring in each month during the funding period.

• Calculate Contribution to Burn Rate: Subtract expected revenue from your monthly expenses to reduce your burn rate.

• Adjust Required Funding: If your cash inflow significantly reduces your burn rate, adjust your target raise accordingly.

Example: If you project $10,000 in monthly revenue and have $40,000 in monthly expenses, your adjusted burn rate becomes $30,000, reducing the capital needed for a 12-month runway.

7. Research Comparable Funding Rounds in Your Industry

Objective: Get a sense of typical funding amounts for companies at your stage and industry, which can also align with investor expectations.

Where to Look:

• Crunchbase and PitchBook: Use these platforms to research average funding rounds by industry, stage, and geography.

• AngelList: Check profiles of companies similar to yours for insights into their funding rounds.

• Competitor Announcements: Look at recent funding announcements from competitors or similar companies to gauge market expectations.

Example: If similar early-stage SaaS companies are raising around $1M, use this as a benchmark to ensure you’re not under- or over-raising.

8. Consider Additional Strategic Factors

Objective: Account for factors beyond pure financial needs, such as market competition and investor interest, which may influence your decision.

Strategic Considerations:

• Investor Interest: If there’s strong investor interest, you might raise slightly more to capitalize on favorable terms.

• Competitive Landscape: If competitors are rapidly expanding or raising large rounds, consider raising more to accelerate your growth.

• Future Fundraising Plans: Ensure that this round positions you well for future rounds without needing to over-dilute early on.

Example: If your sector is experiencing high investor interest, raising a larger round (with a longer runway) may help you outpace competitors and avoid a second raise too soon.

9. Finalize Your Target Raise and Prepare a Justification

Objective: Decide on a final amount and be prepared to explain how it will help achieve specific goals.

Justify Your Funding Ask:

• Explain Your Runway: Describe how the funds will give you enough time to reach major milestones.

• Outline Key Milestones: Detail what you plan to achieve (e.g., user growth, product launch, revenue targets) within the funding period.

• Present a Clear Use of Funds: Break down how the funds will be allocated, such as 40% to product development, 30% to marketing, and 30% to operations.

Example: “We’re raising $750,000 to extend our runway for 18 months, focusing on reaching 10,000 monthly users and achieving $50K MRR. This amount covers operational costs, allows us to scale marketing, and includes a buffer for unexpected expenses.”

Summary Checklist

1. Define Key Milestones: Determine the goals you need funding to achieve.

2. Calculate Runway: Estimate the timeline needed to reach these milestones.

3. Project Expenses: Calculate monthly burn rate across all expense categories.

4. Add a Buffer: Include 10-20% extra to cover unforeseen expenses.

5. Align with Dilution Preferences: Ensure the raise fits within your desired dilution range.

6. Adjust for Revenue: Factor in any existing or expected revenue to reduce funding needs.

7. Research Comparable Rounds: Check industry standards to align with market expectations.

8. Consider Strategic Factors: Take into account competitive landscape, investor interest, and future fundraising.

9. Finalize and Justify: Decide on the amount and be prepared to explain the rationale.

By following these steps, you can determine an appropriate funding amount that meets your growth needs, aligns with your runway, and positions you effectively for future rounds.