Updated: Sep 11
Many entrepreneurs ask "how much to raise?” However, it is not one question to ask, but rather, three:
What are the goals for this funding round, and how long will it take achieve them?
How much are startups (at similar stage and in the same industry) raising?
What is the investment policy of your target investors?
It turns out that there is not a single answer to each of these questions. Fine tuning is required to match the scope of the investors you are targeting.
In this article, I discuss the process of building the financial plan for your startup. I take into consideration target investors and similar startups’ track record as a guide in setting goals and schedule that align with your target investors' goals.
Define your purpose: Why do you raise capital?
The first action you take is to define a meaningful milestone for this round, such that will justify - or eliminate the need fo - the next funding round:
A technical achievement
A marketing achievement
Revenue and operational maturity
Accelerated growth requiring significant resources
We will now prepare work-plans for each major domain within our startup, from R&D to marketing and sales, each such work-plan will detail the people, equipment, investments, offices, and all other inputs required for operation.
Each such plan will be the responsibility of an executive who will take care of its implementation. Does the founding team include the required expertise? And if not, has a future CEO been identified? Is she available for work, would she identify with the venture?
Technological manpower is often the most expensive component in early stage technology companies, and meticulous planning of the resources needed is required by the R&D manager.
How many developers will we need? In what roles? What is the average salary for each role? When and how much will we need to recruit for each position? Is it possible or desirable to outsource some of the tasks at hand? If we do outsource, what are the efforts required for integration and supervision?
Marketing and Sales plan:
Here the costs are divided between the internal sales and marketing team, outsourced teams, advertising expenses and other marketing activities.
Similar to R&D, the marketing manager should not only commit to inputs but also to tangible measurable, results: How much the marketing efforts he has planned cost, and how much would they yield?
Manpower is a major expense with peculiar characteristics:
Hiring decisions are somewhat detached from sales volume, as they are discretionary. Further, they tend to be rigid: It takes time and money to recruit and train, and while success rate is never absolute, it is difficult (and sometimes harmful) to lay off.
Further, Investors tend to look for headcount and measure it against growth, sales, and profit, as a proxy to the organizational culture of the company.
This means a Human Resource table must be maintained separately, concentrating allocations from development, marketing, headquarters, and when required - production.
Forecasts and dependencies
Each work-plan will be laid out in a dedicated table within your master spreadsheet.
While including the relevant expenditure they will crucially include measurable goals, which will be translated into tangible achievements, for example:
How long and what resources will it take to release version 1.0?
How many salespeople do we plan to work within how many months, to generate $X in revenue? ...
Naturally, there will be dependencies between the various plans: for instance, there is no point in launching an aggressive sales campaign long before a production version is ready for release.
Infrastructures, and Operational Plan
HQ Operational plan
What are the costs of setting up and maintaining a website?
What are the cost of office space, complete with insurance, taxes, electricity and other anticipated expense?
Which officials are expected to be at headquarters?
All these will be listed in the table for “General and Administration" that will add the expenses of consultants, bookkeeping, accountants, and lawyers.
Some businesses require physical infrastructures for manufacturing, for delivery, for equipment and merchandize storage.
Now, oftentimes physical infrastructures have the annoying tendency to be built for purpose (think about a production line, with dedicated machines, environment control, and workflows embedded in bricks and mortar).
Infrastructures must be planned in advanced, with machinery and equipment procured, if not made to order. The location has to be approved by authorities, it carries rates and utility bills, and what's more: it starts to deteriorate the moment it is built - wear and tear play here, as well as the technology useful life.
Set aside amortization, there are immediate cash flow implications to building infrastructures with an initial cash outflow - and running them, incurring repeat expenses.
Infrastructure Set up should be managed separately. Because of its project management implications (separate budgets, risks). Sums will be then drawn to the master spreadsheet.
Similarly, technology projects, specifically in the hardware domain, tend to require high and risky initial expenses (R&D, engineering, tooling, testing, certification, etc.), and then subside to maintenance mode. If you are into a hardware project, you’d better separate the initial phase from long term production, for clarity and control.
Sadly, these expenses would be deemed none recoverable - should the project fail, investors will rarely recuperate much of them, if at all.
When manufactured physical products are involved, and once tooling and other non recurring expenses are paid, unit economics will come into play:
Bill of materials (Raw materials, components, sub assemblies) need be sourced, stored , and handled; labor has to be accounted for.
Products will have to be inspected, packaged, shipped - each activity carrying its own costs, sometimes many months before sales proceeds enter the coffers of the company.
Payment schedule and risks add to the required working capital.
SaaS: Acquisition Costs
SaaS products seldom sell themselves: marketing and growth activities tend to gobble important sums, dwarfing the R&D costs of earlier stages.