It’s often hard to determine exactly how much capital to raise. Should you raise enough for 6 months, 1 year or 2 years? Should you raise enough to buy assets or just lease them? Are you asking for too much? Too little? Should you be talking to an investor a bank?
Yeah, it’s a bit overwhelming.
The trick to assessing your capital needs is to break them into smaller milestones and determine which milestone you need to fund next. Startups don’t get a giant check all at once to take care of all their capital needs. They get enough money to reach the next major milestone, and then they raise more if they need to. What we’re going to work on is identifying your next major milestone and the best path to fund it.
Phases of Capital
Before we dig into milestones its first helpful to get a better feeling for how the major phases of capital raising tend to work. We’ll dig into this more a bit later but for our purposes now, capital raises tend to work in this order:
- Personal Capital ($50k or less). You use your own means to get the business incorporated, perhaps build a prototype of the product, and try to solicit an early adopter to get validation around your business.
- Seed Capital ($250k or less). An angel investor (which his often someone you have a previous relationship with) puts in a relatively small check for equity. Alternately you may secure a small loan from a bank, although it’s often hard to do without some sort of asset as collateral.
- Angel Capital ($1m or less). Professional angel investors (similar to Seed Capital) who make angel investments for a living invest a more significant amount of money in the business in hopes that it will help you achieve a major milestone that could attract a much larger follow on funding round.
- Venture Capital ($1m or more). Once you’ve shown you have a great deal of traction (we’ll talk about this later) professional venture capitalists look to inject large sums of money to really grow the business significantly
While the amounts of each stage may vary a bit (we’re using typical averages here) the phases are pretty typical. You will want to focus on raising enough capital for this phase of the business, wherever you happen to be.