Raising Capital All At Once
You should decide whether to raise necessary capital for your business either all at once or in a piecemeal fashion.
Most founders prefer raising the capital once. For instance, in the event that a founder has prepared a business plan and they need a specific amount of money to launch and run the business, it is logical that they have to raise the required amount of money once. By raising the entire budget all at once, the founder can settle and focus on running the business.
However you need to ask yourself the following questions:
- Is the amount of capital you wish to raise relative to the size and stage of your business too high?
- Do you expect the money raised to support your startup business in the growth and scale stages?
- Is there a chance you will need more capital in the future?
- Do you have a clear view of your milestones and what you wish to achieve with the funding?
- Do you want to manage the amount of dilution in your shares and also maximise your company valuation when raising capital from investors?
If you answered yes to any of these questions, you may want to consider raising capital in stages, following a step by step approach. By breaking down the amount of funding you need into smaller parcels, you may find it is easier to raise capital from investors and also end up with a greater overall shareholding. Here is an example of a step by step approach:
Say you need to find an investor to support the following use of funds:
Product Development (15 new features): $250,000
Marketing (Global Campaign): $500,000
Sales Staff: $750,000
Total Funding required: $1.5M and you offer investors 30% of your company.
Option 2: Step by Step Approach
Ask investors for $750,000 for 12.5% of your company.
Use of Funds:
Product Development (8 new features): $150,000
Marketing (Local Campaign): $250,000
Sales Staff: $350,000
- Secure 100 new key clients in your region
- Hire new staff and make them profitable in your business
- Complete the development of your product and collect data on customer feedback, extra revenue, engagement levels, etc.
Once you achieve your milestones from your first funding round, you can then ask investors for the additional $750,000 but at 7.5% of your company’s value.
You end up raising the same $1.5M, but over two funding rounds, and you give up 20% rather than 30% of your company. This strategy allows you to increase your chances of raising capital whilst giving away less equity. This is due to:
- Your first funding round carries the most risk for investors. They will try to balance the risk by asking for more shares in your company
- By raising capital in steps, you can reduce the risk for investors and demonstrate success by reaching your milestones. Raising a smaller funding round also means reducing your milestones and making it easier to reach your goals.
- After your first funding round is complete and you have demonstrated traction, you are in a much stronger position to not only raise capital but to attract a higher valuation as well.
In this FREE report, we reveal the best way to find investors, the best way to pitch, the funding process, and our top 10 tips for raising capital.