Calculating how much money you need to raise for an early-stage startup is challenging because of all the unknowns. But the success of your startup often hinges on how accurately you judge the amount you need. As Bryan Stolle, Founding Partner at Wildcat Venture Partners, has pointed out, overestimating and underestimating both have pitfalls. Because seed money is so expensive (due to the significant risk you’re asking investors to take on), raising too much has several disadvantages, including giving up more control than you need to. On the other hand, raising too little can end up costing you even more in the long run as you encounter cash flow emergencies. Here’s a 4-step method you can use to know how much capital to raise for your startup.
1. Brainstorm a List of Costs
Start by brainstorming a list of costs. Include the costs associated with every part of running the business. Your list will be unique, but here are a few things to consider:
- Market research
- Product development
- User testing
- Customer service
- Office, warehouse, manufacturing space
2. Look at Similar Businesses
Are you sure you included every cost in your initial list? One way to identify costs that didn’t immediately come to mind is to look at the startup costs of businesses similar to yours (but who aren’t going to see yours as competition). To learn this information, you’ll need to talk with the founders or team members who were involved in the financials from the beginning. While you’re asking about their initial estimates and if they were accurate, also be sure to ask for any advice they could pass along.
3. Identify Your Milestones and Associated Costs
Remember that different costs will occur during different timeframes. Although looking at similar businesses will be helpful in catching costs you may have missed, outlining your milestones and their associated costs will give you a customized timeline for how long each of those expenses will run. For example, your milestones may include launching an MVP, onboarding enough users to prove product/market fit, launching an iterated V2, and building a leadership team with x roles, with each of those milestones running x number of weeks.
4. Create Your Spreadsheet of Costs
Once you’ve gone through the three steps above, you should be ready to create a spreadsheet of costs organized by category. Using a spreadsheet format will allow you to run a variety of scenarios to see how adjusting different elements will impact the amount you’ll need. Don’t forget to include a buffer to account for errors in your estimates. Experts recommend adding a buffer of anywhere between 25% to 50%.
It’s smart to get feedback on your spreadsheet once you’re confident it’s as accurate as you can make it. Industry experts and people with companies using a similar business model will often be able to help you identify blind spots.
Investors Want to See that You Know How Much Capital to Raise for Your Startup
When you’re pitching, investors will want to see that you have a clear idea of how much you need. They typically don’t like to see extremely wide ranges because a range that’s too wide indicates that you haven’t really thought through your costs. Investors know that your estimates are just that — estimates. But they need to see that you have a carefully-thought-through game plan based on reality.
Want to learn how we help startups think through all the angles of their idea, including funding? Ask about our SolutionLab workshops.