For any growing company, it’s likely that the question of raising institutional funds, will come up at some point. Day to day operations, personnel management and delivery, all require a capital influx to gather an initial momentum. Different businesses have…
For any growing company, it’s likely that the question of raising institutional funds, will come up at some point. Day to day operations, personnel management and delivery, all require a capital influx to gather an initial momentum. Different businesses have different potential, and how much money you need, initially, can depend on various factors – the industry, competition, market share, and scalability. All these factors affect the company’s valuation as well.
So how do you decide how much should you raise, if at all?
As a founder, you’re sure to think that the business idea will create value, and might want to raise as much capital as possible. And if the startup shows promise, venture capitalists are bound to invest – keeping in mind that they are looking for multiple times the return on the investment.
Claus Moseholm, co-founder of GoViral, proceeded to fund his company with the profits made off of the company’s multiple successful viral video campaigns, starting in 2005. Moseholm and his partners built up the company into Europe’s leading platform that distributed video content. In 2011, GoViral was sold for $97 million, without having raised a single penny of external funding.
So here’s the thing, raising less, while it keeps the initial valuation down, can pace growth, so that the value of the company increases steadily over time. If you are looking for an early exit, raising the right amount can ensure that investors, employees and founders, all profit from the sale of the company. At the same time, the capital also needs to be enough for the company to work with, whilst it achieves major proof-points and milestones over time, which is necessary to justify the increase in valuation at the next round.
In 1977, when Apple needed $15,000 worth of material to complete their first order, they managed to commit, and raise, on the basis of a $25,000 purchase order. In January 1977, Apple was valued at $5,309. By the beginning of 1981, it had gone public for $1.79 billion.
Raising more capital, if you’re in it for the long haul, can protect the company from a treacherous funding environment in the future. At the same time, you don’t want to dilute your stake, too much, all at once. Striking a balance is key.
Getting close to the Goldilocks zone of raising capital requires a steady, hawk’s eye, on timelines and milestones, and a detailed estimate what kind of spends will come up along the way. It is important to know that the next round of funding will take some time to materialize. Just enough for lift off, until you have enough justifiable accomplishments to raise the next round, and also raise valuation in the process, is ideal.