How Much Money Should I Raise?
“How much money should I raise” is a common question founders ask during their startup journey. The answer is highly dependent on three items: timing (how long of a runway do you want to raise for?), metrics (what are the assumptions and drivers of your business) and the stage of your company (what has been proven out already - how many unknowns do you have to prove).
While there are some general rules for fundraising, 12-18 months runway and hitting your next milestone, it’s important to understand the details of your business model, what % of your company you are willing to give up and the drivers of your business.
We’ll walk through a basic example with an apple orchard business.
First, we need to start out with the business assumptions.
What do we have to sell?
Each apple tree will produce 50 apples per month
How do we sell it and at what price?
It costs $200 in marketing & sales cost to gain a new client
Each client will purchase 250 apples per month
An apple can be sold for $2 each
What is the cost to create our product?
The cost of an apple tree is $2
An apple picker costs $12/hr
An apple picker can pick 50 apples per hour
Assumptions of the apple orchard business.
Once you have your assumptions, you can put them into a business model (commonly in an excel sheet) to see what it takes to grow your business. This is the first step to determining how much you should raise to get to your next goal. Remember, they are called assumptions because they are educated guesses being made about your business. As your business grows, you will substitute the assumptions with actual numbers as you gain more knowledge and experience. Make sure your assumptions are backed by market research and be able to explain how you came up with the assumption. For example, if you price your product at X dollars, you might look at competitors to determine approximate price points.
Next, we’ll want to look at company drivers- the attributes that will affect our business’ outcome. In our apple orchard example, the company drivers are the number of apple trees, price per apple, cost to pick the apples, number of customers and cost to acquire a new customer (CAC).
In the first month, the company has 1 apple tree that produces 50 apples per month and it costs $12 to pick those apples. They have 1 customer who purchases all of those apples for $100 ($2x50). They spent $200 to acquire that customer, so they end up with a gross loss in the first month of $132. However, their CAC is a one off cost to the business this month and in month two they will benefit from this new customer and will begin generating a gross profit.
Month 1 revenue, costs, and margin.
The company decides to focus on growth and purchases 4 additional apple trees for $20/tree. They know within a month, these new apple trees will produce an additional 200 apples per month, totaling 250 apples per month. This is the maximum amount of apples their one current customer will purchase, increasing revenue to $500 in month two. The total gross profit generated in month 2 is $340 with a gross profit margin of 68%. The apple orchard is now producing the maximum number of apples for its customers, and therefore, they decide to increase the number of apple trees and the number of customers to generate more profit.
Month 2 revenue, costs, and margin.
In month three, the apple orchard focuses on sales and marketing and gains a new customer for $200. They also purchase 2 additional apple trees. The total number of apples produced is now 350 apples per month, which equates to $1,400 in revenue. The cost to produce these apples totals $424, which includes the cost to pick apples, purchase the apple trees, and gain a new customer. At the end of month 3, the apple orchard produces a gross profit of $976.
Month 3 revenue, costs, and margin.
The apple orchard decides it wants to grow its business faster. To do this, they invest in the following:
Purchasing 50 additional apple trees
Selling 3 new customers
Hiring 5 full time managers to run the business (4k/month per manager)
Now it’s time to run some numbers! With these new investments, what’s the total investment amount the apple orchard is committing to? How long will it take to pay back that investment?
These are all great questions that all founders will ask themselves, regardless of their business. Hopefully this apple orchard example gives you a simple way to think about investments in your business, growth, and financial tracking.
