Too many entrepreneurs jump right into raising money before taking these three important steps. This is the main reason for the horror stories you hear about entrepreneurs whose investors are making the miserable. Do these three things BEFORE having any conversations with investors to save time and lots of potential future headaches.
This post talks about the third thing: Get clear on how much to raise.
Method 1: Financial Projections
Financial projections help you see gaps in your cash flow which might require you to bring on outside investment to prevent running out of cash. Many businesses raise capital when they are first starting out because it takes time to reach breakeven (when revenues meet or exceed expenses). If you can calculate how much of a shortfall you have before you reach breakeven, you know that you probably need to raise about that amount to be able to keep the doors open and not run out of cash.
If you do not yet have financial projections, use our simple template.
Method 2: What do You Need?
Another approach you can use for determining how much you need to raise is to think about what you need to purchase to take your business to where you want it to be and how much that will cost. Here is an exercise to help you do that.
1. Make a detailed list of the things you need to buy over the next year or two that you cannot buy with current cash flow (or other resources such as barter).
2. Put dollar amounts next to the items you listed in Step 1. Add a 10-20% contingency line.
3. How will having that money affect your business? For example, if you hire two new sales reps, will that lead to more expenses e.g. will you have to hire a COO? If so, add those expenses to the list.
4. Consider creating more than one scenario. For example, if you focus on one line of business versus another, your needs will be different. Create multiple scenarios for each possibility. It is often best to choose the scenario that allows you to achieve breakeven while raising the lowest possible amount of money. You can also create scenarios for different amounts – you may want to raise a minimum of $300,000, but you should also consider what a larger amount could make possible and consider setting a “stretch goal.”
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Here is an exercise we recommend in order to make sure you get your fundraising done within a reasonable amount of time.
1. Imagine you have reached your fundraising goal. You are looking at the list of all your investors and how much each one invested. What is the lowest amount that someone invested and what is the highest amount? Try to create a clear picture in your mind of your investor list and the amounts invested.
2. In your imagination, scan the list and estimate what the average investment size per investor is. For example, you may picture that you’ll have some people come in at $5,000, some at $10,000, a few at $25,000, maybe one or two at $50,000, and one at $100,000. In that case, you may estimate the average per investor to be $20,000. You can use this tool to decide how much you’ll ask for from each potential investor: http://www.jennykassan.com/blog/7-steps-for-making-the-big-ask/
3. Now, take the total amount you want to raise and divide it by the average per investor. That will tell you the approximate number of investors you’ll have when you reach your goal. So, if you want to raise $400,000, you’ll end up with around 20 investors.
4. Multiply that number by 10. That is the approximate number of potential investors you’ll need to talk to about your offering. (This assumes that an average of one out of ten people you talk to will say yes—you may do much better than that, but it’s best to be conservative). In our example, this would be 200.
5. Divide that number by the number of weeks you would like to devote to reaching your funding goal. This is the number of people you will contact per week about investing. So, if you’d like to reach your goal within six months, divide 200 by 26 weeks—you need to contact 7-8 people per week.
6. Assume that for each contact you’ll need to spend 30-60 minutes on average. Multiply the number of people you’ll talk to per week by the average number of minutes you think each contact will take. That is the total number of hours you should schedule into your calendar for contacting potential investors. Add at least half that many hours to give yourself time to follow up with people who haven’t yet given you a definitive answer. In the example above, I would assume eight hours per week plus another four for follow up—so a total of 12 hours per week should be spent contacting potential investors.
7. Now block out that time in your calendar for the number of weeks you gave yourself to reach your goal.
If you use this method, you’ll keep your momentum going and get that fundraising done before you know it!
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