How much cash should I ask an investor for?
Wednesday, September 5, 2012/
This week’s Secret Soloist is answered by Philip Alexander, of Hall Capital:
I have been involved in, and witnessed, many start-up capital raisings. There are some common challenges and they might best be addressed by considering these questions.
How much funding does your business plan need?
You certainly don’t want to raise a small amount now and then have to raise another amount within 12 months. You should be focused on building the business, not attending multiple investor pitch meetings. So 12 months cash runway is a guide. Expect to pay yourself a small salary or none at all in this period.
Who are you approaching for funding?
If you are approaching “friends and family” then the amount you raise might be less than from a high net worth or a professional angel investor.
Your first “seed” round with friends and family should be large enough to be able to hire key contractors, validate your business model, and to gain some commercial traction. This would put you in a position to seek another round of funding from (happy) friends and family, or to approach angel investors.
How do you value your business plan now?
Early stage investors are more attracted to businesses with a solid business plan, two to three year financial forecasts, detailed expense budgets by month, and a set of achievable operational milestones.
Keep your valuation low enough to attract an investor and offer 10-20% of the business. They might then commit cash based on the achievement of your operational milestones. For example, $50,000 for the first three months, $50,000 once your website is running, $100,000 to hire a salesperson and so on.
This approach keeps both you and your investor focused on milestones.
Your second round of investment might be for another 10-20% of the business and perhaps double the original valuation, assuming you have achieved market validation and commercial traction.
Most of all, keep your investors and potential investors informed of the business activities and results on a regular, monthly, basis.
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