Raising Money for Inflection Points

As a business gets off the ground and ideas are swirling in the air, startup founders start committing significant time to raising money.  The question is how much money should a startup raise?  Most founders will answer “as much as possible,” however, that is often the wrong answer for investors. Some founders think it’s important to get a high valuation in hopes of more money coming in the door upfront.  This can also be another potential pitfall.  Valuations are great, but the market sets the price of your company.  A valuation can be high, but the market may indicate and act otherwise.    A company will never raise more money than the market is willing to invest.

What founders should be focusing on is infection points in their business.  When raising money, there should be a reason as to why you are asking for $5M compared to $1M.  An investor needs to know where that $5M is going to get the company.  If a company can only accomplish half their goal with $5M, than that $5M is already lost money to an investor.  If a company can have a finished product ready for market with that $5M, that is an inflection point in your business that an investor can get behind.

As you map out your business, think long-term and realize that your business likely won’t get big money up front.  It will take a few small tranches of money, until larger sums are realized.  Accordingly, think of fundraising like a road trip.  Plan your path and know where you need to take a pit-stop (i.e. get more money).  Think about each tranche of money and how it will relate to an inflection point in your business (i.e. working prototype, completion of code development, finished product, commencement of revenue, etc…).  Think about how much of a runway you need to reach each inflection point and how much money will be required to get there.  Creating a plan and a road map will help investors understand that you have a structured plan to execute an idea.

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