How Much Investment Cash?
New entrepreneurs regularly ask me how much capital they should ask for when they approach investors. It turns out that this is a relatively simple question to answer, and one I will address here. The simple answer is: as much as you need plus a cushion. Here is how you determine how much you need:
Step 1: Create Your Income Statement
Based on your assumptions concerning pricing, marketing and sales methods, costs, and expected sales volumes, create monthly income statements. If you don’t know how to do this, Offtoa™ is a tool that asks simple questions about your business and creates your monthly income statements for you . . . in the same way that Intuit’s TurboTax® asks simple questions about your income and deductions and creates your tax return.
Step 2: Create Your Cash Flow Statement
Based on additional assumptions concerning how quickly customers will pay you and a few other factors, create monthly cash flow statements. Once again, if you don’t know how to do this, Offtoa can create your monthly cash flow statements for you.
Step 3: Look at the Low Point on Your Monthly Cash Flow Statement
Examine the cash balance at end of the month at the bottom of each column on your monthly cash flow statement to find the month where this value dips the farthest below zero. You will need to raise this much money before this date to stay solvent.
Step 4: Add A Cushion
Since nothing will go exactly as planned (e.g., revenues will be lower, the sales cycle will be longer, expenses will be higher, and so on), add a cushion so you don’t run out of money or have to ask for more.
Step 5: Timing
Timing of raising capital is always a challenge. If you wait too long (e.g., you get close to running out of cash), less respectable investors could take advantage of your situation by delaying their decision to invest until you are desperate and you may end up being forced to accept less-then-ideal terms. On the other hand, if you solicit investments too early, company valuations might be lower than you would like, and you may end up having to sell a larger percentage of the company to raise necessary cash. No perfect answer exists, but unless you are about to hit a major valuation-changing milestone, I would err on the side of too-early rather than too-late. A good solution in many cases is to plan for a series of investment rounds, each one at a successively higher price per share, and each one timed to ensure that the company does not run out of cash before the following round.
The above is extracted from my latest book, Will Your New Start Up Make Money? Buy your copy in Kindle or paperback format at http://www.amazon.com/Will-Your-Start-Make-Money-ebook/dp/B00JOOZQNE.