Since we are talking about exploring a series of issues around fundraising for startups, I thought I would say a couple of things about the running cost and how it affects fundraising.
One of the many reasons a startup could be raising funds is to serve a war chest of some sort and give it enough running capital till it gets to the next milestone. It will be unusual to find any startup that simply raises funds and then channels all of them into the purchase of equipment or just launching a product into the market. Some funds will normally be set aside to cover the cost of running the business.
Once you understand this, you will realize that knowing your running cost can help you better decide the sum to raise. After all, what will be the point of injecting funds into a marketing campaign and not having enough money to pay the staffs that will keep the campaign afloat?
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So, how do you determine your running cost?
It might surprise you that even some small business owners do not have a clear picture of their running costs. Most of the owners only keep account of salaries, which is the most obvious one. But running costs cover a whole lot more than just the salaries of your employees.
Besides the salaries, you should be looking at other costs like renting an office space (if you choose to), purchasing the right technology and equipment and so on. If you or your team members are going to have potential trips during the period, it will also be good to factor in the budget for the trips.
If you do not have a marketing or sales team yet, you should consider that when you do set them up, they will have to run with a budget as well. If you already have one, get a budget that covers whatever activities they need to carry out in line with the new milestone. Are you going to be creating a website or building an app for the next stage? Factor in the cost too. Your digital marketing team may also need to present you with their strategy and budget for running ads and setting up distribution channels.
This is only a small part of the math you need to do. In determining the sum to raise, you need to get the running cost (for the number of months) to keep the startup running till the next time you will need to raise funds, or till the point it becomes profitable. This could be anywhere from 12 months and 30 months. How much you will raise is determined by your unique needs and goals as a startup, what you have achieved and what you plan to achieve. Even if two startups are looking to raise the same amount, their budget for the money cannot be the same.
Now here is a trap you should not fall into.
After understanding running costs, some founders and entrepreneurs think that all they need do is multiply it by the number of months projected till the next milestone. So if their present monthly running cost is $2,000, they think that by simply multiplying it by 12 or 24 months, they will get the total running cost for the period.
This is very wrong, and if you do make the mistake, you will discover that you have fallen into a capital sin.
Your monthly running cost changes over time. You must factor in inflation (there is the percentage used in calculating that). You also have to factor in additions to the team. For instance, hiring two more tech developers over the span of the expansion will increase your running cost significantly. So always keep in mind that at some point, you may need to hire some more hands especially if the growth happens faster than you envisaged.
You should also factor in transition costs. Are there marketing experts, salespeople, or engineers who are currently working part-time but will need to move to full-time employment for you to achieve your next milestone? What extra will it cost you for such staff to transition into full-time employment?
When you eventually figure all of these out and do the math to cover the period before your next funding, you will have had a minimum figure of what you need to raise. A smart thing is ensuring that your budget is sufficient to cushion the impact of unexpected lags and delays which often come up. It will not be good for you to run out of funds just at the point you need all the financial momentum to push through on your targets