How much money should you raise for starting up?
Obviously, this depends on the nature of the business, what is required to be done, your and your team’s capabilities, the competition, etc.
There is no one ‘real number’ on the investment required as that number would be different not just for different businesses but also would be different for different execution strategies for the same business plan.
In fact, there are startups in the online space which have done excellent progress with some angel investments, while there are others which are scaling up nicely with crores in funding, largely for marketing investments.
Broadly speaking, concepts that have been proven and just need great execution + marketing to build a scale business will need to raise larger capital. Concepts that have yet to be proven in the market place could do with lower levels of funding in the initial stages. This is because you don’t need senior employees and huge marketing programs at pilot or proof-of-concept stages.
What is essential therefore is to have a realistic estimation of the costs and investments required to reach the milestones.
Most often entrepreneurs go wrong in estimating funding needs. They are unrealistically conservative on costs, and impractically optimistic about revenues. Underfunding your venture i.e. raising lesser money that is practically required can have serious consequences as you could run out of cash sooner than expected, thus leaving you without capital to continue the venture… or having to rush to raise another round in a distress situation.
One question investors are most likely to ask you is how much money you need in the round that you have approached them for. While most entrepreneurs give a one-figure reply, my preference is for entrepreneurs to provide a perspective of what can be achieved with different levels of funding. E.g. with INR 50 lacs [USD 100,000] you could develop the solution on a SAAS platform, hire a base team, prove the model in one market and prepare the company for scale. However, if you had INR 200 lacs as a commitment, even if the first tranche was the original INR 50 lacs, you could accelerate the hiring and scale up as soon as the key performance indicators were on the right trajectory. On the other hand, if you got just R. 25 lacs [I.e. USD 50,000] you would just develop the product, outsource the online marketing to an aggregator agency, and prove that the concept works.
You need to bear in mind that if you business is successful, you are most likely to need MORE CAPITAL. Most entrepreneurs assume that very quickly their business will be cash positive and that they are not likely to require more capital beyond the first round.
Working on a realistic business plan is therefore critical in determining how much money you are likely to need for your venture.
Glad you found it useful Kamal
its really useful for me. thanks
i think many of us now look fwd to reading your mini articles every monday 🙂
Thank you Abha 🙂
It seems I will have to keep on replying to your posts, as and when I read them and note down various points.
It seems you are like the guiding star for a lot of start-up planners.
Thank You once again. I would really be glad to have a conversation with you someday.
Thank you Karan. Glad you find them useful.