This video focuses on how to determine the right amount of capital to raise in a financing round, emphasizing understanding monthly burn and the cost to reach the next milestone.
What this video covers
First, are the key figures that you need to know. On the firsthand, what you’re going to see is the monthly burn that you have. You need to understand how much cash you are burning every month, meaning how much you’re in the red every month that you’re operating.
For the most part, if you’re at an early stage, you’re going to be talking about staff and also the rent. Those are the two biggest expenses that you’re going to have. Then you can add in there the software that you’re using and any other types of subscriptions that are adding up every month to your monthly bill. That is the monthly burn, and that is a number that you need to really have a clear grasp on.
The other figure that you want to keep in mind is the cost of getting to your next milestone. That is without counting with your existing revenues, and only counting with your monthly burn. How many months or how much is it going to cost you. Maybe your next milestone is in 12 months or in 18 or 24 months. How much money is that without counting with revenues? That is a critical figure that you need to know.
Then you have the key strategic considerations. Obviously, on the firsthand, it’s going to be all about dilution. How much equity are you going to be giving away? The rule of thumb in every financing round is that you’re not diluting the equity ownership by more than 20% or 25%.
You want to always keep it under those figures so that you are not overdiluting yourself, and you can continue to mature the business; because, remember that if you’re really building and executing a hypergrowth business, you’re probably having to go to different financing cycles, and on every financing cycle, you’re going to experience some type of dilution.
With that being said, you really need to have a clear understanding of what the dilution is going to be, what is going to be the potential valuation of the business for that amount that you’re raising, and so forth.
The other thing is the control and the flexibility. Obviously, the more dilution, the less control that you and your co-founders are going to have. For that reason, you want to make sure that also, you’re thinking about the potential player that is going to come in or that investor that is going to come in and perhaps is going to share control, vote, and voice with you at a board level with the business.
Then you want to think about investment levels. There are great people out there such as Chris Dixon from Marc Andreessen, and he says that whatever you want to raise, you want to add on top of that 50% more just as a buffer.
Now, you’re going to have different scenarios. You’re going to have the Idealist Scenario, where everything is falling into place. You’re getting the exact amount that you need to execute.
You’re going to have the Worst-Case Scenario, which you need to prepare for, where you are not raising enough to reach your milestones in 18-24 months. Maybe you’re just raising for 12 months, and that’s okay, but you’re going to have to figure out how you’re going to go out to market right away. Then, you’re going to have the Realistic Scenario, which is more on the conservative side. Maybe you’re going to shoot a bit lower. Instead of going for the 24 months, maybe you just go for the 12 right away.
Again, you’re going to have different scenarios, and you need to be able to walk the investor through what you’re capable of doing. For example, if you give me $5 million, I can do between this, and this, and that. If you give me
0 million, I can do a bit more and accelerate by this and that.
In the end, remember that there are going to be two types of valuations. You’re going to have the founder valuation, which is what you think that the business is worth, and then you’re going to have the market valuation, which is what the market is paying you.
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