Ask an expert: How much money does a business need to raise?
The simple answer is enough to fund 18 months with adequate buffer. Entrepreneurs are generally pretty good at estimating expenses, but underestimate their working capital needs and are too optimistic on revenue estimates.
February 16, 2016 at 5:52AM
How do you know how much to ask for when looking for the next round of funding?
I have made 1,000 units (with my first investor) of my invention to demonstrate sales and need in the marketplace. I am down to about $30,000, and need to raise another round of cash, but how much is too much to ask for? My goal is to eventually be in the feminine care aisle of every retail pharmacy.
Pamela Cole
President, FemiCorp, LLC
answer
I advise entrepreneurs to shoot for 18 months of funding per raise. If you plan on six months of hard work to get the raise completed, that leaves you with a year of runway after the raise before you need to start raising another round. That 18-month window should be modified to include hitting significant milestones (patent, prototype, first revenue, etc.).
So how much do you need to raise? The simple answer is enough to fund 18 months with adequate buffer. You develop a cash flow model in which you estimate the inflows (sales, loans and investments) and the outflows (expenses, capital equipment investments and working capital) during the period and then add a buffer of 25 percent to avoid running out of cash. Entrepreneurs are generally pretty good at estimating expenses, but underestimate their working capital needs and are too optimistic on revenue estimates.
Working capital is critical. In the retail market, payment cycles are frequently quite long. Your customers' terms may be 90 days or more, but your terms with your suppliers may be COD, net 15 or, if lucky, net 30. If your sales are growing, your working capital needs to increase quickly, since your accounts receivable increase with sales. Consider factoring or selling your receivables or negotiating a line of credit based on your receivables with your bank. This adds costs, but it can significantly decrease your working capital needs.
In estimating revenue, remember nobody signs off as quickly as you expect. Be cautious. Finally, be conservative in your revenue and cash flow estimates, because running out of cash usually kills a business.
About the author
David Deeds is a professor of entrepreneurship at the University of St. Thomas Opus College of Business Schulze School of Entrepreneurship.
about the writer
The funding is expected to give more than 5,000 Minnesotans, especially in rural areas, high-speed broadband access across the state and help at least 139 businesses and 368 farms.
