In this week’s “Raising Capital” segment, we want to touch on one of the most common questions that we get: how much money can I raise? And we tell clients, that question is improperly phrased. You should be asking the question, “How much capital should I raise?” More often than not, small business owners and operators, once they have made a determination of how much they can raise, it’s actually not enough. A lot of times we have an incorrect assumption of what’s going through an investor’s mind. They’re not looking at how cheaply they can get the investment. They’re not buying a car or a tractor. They’re making an investment. They’re coming alongside for the journey, and the first thing they want to make sure of is that the company is going to have enough capital. Last thing in the world they want to have happen is an unexpected event to come and hit the company, causing the company to scramble to handle the event… like a pandemic. Which is why the government took such quick and drastic action in putting all kinds of money into the system to help companies make it through. Many of them still did not.
We wish we had a formula, something like, “Take the cost of your payroll and multiply it by 4.75, and then that’s how much capital you should raise.” It’s not that easy. It is more art than science. There’s also the investing public. It’s impacted by your competitors. You need to be looking at raising capital in a series of rounds. Traditionally, as in venture capital, there’s seed round, there’s series A, series B, all the way up to series E. A lot of small businesses will never get through all those rounds and will not necessarily follow the traditional model. But more often than not, they’re going to raise equity more than once. What you want to be looking at is how much equity do you need to raise to get to the next phase of your business. If you model out your business over several years, maybe your metric is the number of customers. So if I’ve got 5,000 customers now, I need to get to 15,000 customers. How much money do I need to get there? How much money do I need to cover marketing spend? Or to buy assets or to hire people to service that number of customers?
It’s a very complex question. It’s a question that we help our clients deal with on a regular basis, and we’d like to help you! So please reach out, get some time with us, and we’d love to help you out. You can also check out these articles from Holloway.com and crunchbase.com for more on the subject.