After your cash flow projection is finalized, you can visualize how much capital is required for your new corporation. Of course, a reasonable projection does not extend infinitely into the future. The funding estimate customarily covers the first two or three years of operations.
There are several phases in the progress of a new corporation. Therefore, the funding may advance in stages. So the question arises of how much money an entrepreneur should raise upon startup. Is that all the funds required to reach a distant pinnacle or just what’s needed for the initial launch?
The general answer is that a new corporation should obtain the least amount of investor capital at startup when intending to keep the valuation down. This permits an easy exit for early investors. When the company is profitable in the future, its price will significantly exceed the early stage pricing. The startup investors make a sound return on investment. The downside is that raising too little money may cause trouble obtaining enough capital in the future.
Conversely, a new corporation should raise the maximum amount of capital at startup if it intends to protect control over ownership and operation by the founders. The company avoids having to raise future expansion capital in a poor funding environment. But raising too much capital can cause you to make less money from the investment. The startup funding places a high valuation on the company. Future late stage investors may demand dilution the of the founders’ stock value.
The key is to align the startup funding with investor preferences. Some investors want to keep valuation low and limit dilution. Others want an assurance that the business won’t fail from lack of sufficient capital.
Whether you’re raising millions or a small amount of seed capital, there’s always flexibility in the funding amount. The amount of startup capital is based upon categories within an order of importance. Operating funds are the primary category. This is the absolutely essential money required to meet immediate objectives up to the next funding round.
The second group is runway funds, which are needed to continue operating while raising the next round of capital. Next come contingency funds that are required for unplanned setbacks. Final consideration is given to opportunity funds, which permit the corporation to take advantage of unexpected positive events.
The wildcard is usually the salary requirement for founding entrepreneurs.