The problem of money looms over every business venture, especially in its infancy. Asking for money is about as much fun as getting a tooth pulled for most people. The question of how much money to start a business is not an easy one to answer and it’s obviously different for each enterprise.
Here are some clear principles to follow that will help make your particular answer a little clearer.
Setting achievable benchmarks that you can reach one at a time is more than just good psychology. The benchmarks can help you break up your funding needs into smaller, more manageable chunks, and they can actually make raising that money easier.
Develop a budget for what you’ll need to reach each milestone. The milestones can be anything from producing a prototype to having a prospect list of a certain size—anything from marketing to production that will be a clear victory for you in moving the business forward.
Then you can use the milestones as a tool in fundraising. Just before you achieve a breakthrough can be a good time to reach out to potential investors. You can offer them the chance to get on board now, saying that after the benchmark is achieved, you’ll have more people lining up. You can also take the approach of reaching out immediately after a benchmark has been achieved to build on the momentum.
One mistake you don’t want to make is reaching out at an “in-between” phase. You want to give your investor the prospect of a milestone soon to be achieved or the certainty of a milestone just passed. There’s nothing attractive about coming on board in the dry middle.
When assessing your cash needs, the first thing to look at is your monthly burn rate. This is the amount of money that gets “burned” just to stay afloat, from salaries to office space to basic expenses.
Once you know your burn rate, you can look at what it will take to get to the next milestone. Do you need to hire more people? What will be the costs of research and development? Putting these together will give you a concrete number to aim for in your next round of fundraising.
The risks of too much
It’s easy to say that you can never have too much, but there are consequences to being excessively flush with cash.
There’s a good chance that the additional money probably came with additional control being given to outside investors. There’s also the psychological problem that extra money leads to financial laxity and takes away the sense of urgency a start-up business must have.
The adage “More money, more problems” has a definite ring of truth. Having said that, it’s certainly preferable to have too much rather than too little. You have to find the right balance that works for your business.