How much investment should I ask for?

You’re a start-up founder or early-stage entrepreneur and you want to fund or grow your business. How much investment should you ask for?

There are two schools of thought here.

The first says that it’ll take the same amount of effort to raise £1m as £100k, so you may as well go for the full whack. You may also consider giving yourself the longest runway possible, so you never run out of cash.

There are at least three problems with this approach:

1. It’ll take way too long. In fact, it’s likely to take you around 6–12 months to raise anywhere near the higher figure — and that’s if you’re already skilled at raising capital. You’re going to have to find between 20–30 private angel investors and/or one or two institutions or small funds that can invest. Obviously, that’s going to take a lot of work — and a lot of your time.
2. You’ll have to give away far too much equity too soon. Early on in its inception your company is at its riskiest stage, and that means it’ll cost you equity to secure investment. Consequently, you may end up with a minority stake in your own company, particularly if you go for a second or third round of investment later on.
3. With a larger investment, there’s a greater tendency to over-spend. If you’ve raised £1m you’re going to want to spend it! And you’ll be spending it at a much faster rate than if you had £100k. Every mistake you make could be all the more costly. For example, instead of getting a shared office out of town, you may be inclined to get a nice West End office with a long lease (that you then can’t get out of). Or instead of finding young, enthusiastic people to work with the company and providing them with training, you’ll be tempted to hire the most experienced people who may not be the best fit, or who may leave after six months for other opportunities.

The second option is a leaner approach to raising capital. Instead of aiming to raise £1m, you shoot for £100k. You then use this cash to validate your business idea in the marketplace and to get to the next stage. That stage could be something like acquiring your first 1,000 subscribers, or developing your product and getting it to market. Or it could just be validating your B2B (business-to-business) approach by finding your first three enterprise customers.

This approach has some distinct advantages:

1. It’s a much quicker raise. You’re likely to be able to put your approach together and raise the cash you need within 3–6 months.
2. You’ll be in a much stronger position to retain ownership of your business as you’ll only need to release between 10–20% of your company.
3. You can take advantage of the SEIS (Seed Enterprise Investment Scheme) scheme. This has huge tax breaks and implications for early stage investors that make it very attractive. It applies to any sums you’re raising up to £150k if your company is under two years old. Find out more here: seis.co.uk
4. It’s far easier to sell as a proposition to investors. When they can see they’ve got a good chance of making ten times their money back, they’ll be much more interested. It also sets up your next round of investment nicely because the value of your business is likely to have increased by then. And again, it will be an easier sell on the second round.

So, if you haven’t yet decided how much investment you should ask for, consider going for a leaner approach. Stick to the sweet spot and raise somewhere between £50k-£150k on your initial round so you can validate your business and get your idea into the marketplace. It makes life much easier for you and your investors, and it’ll give you a strong foundation to take your business where you want it to go.

About the author: Paul is an entrepreneur, speaker and coach, applying his real world start-up and fundraising experience to help business founders and early-stage entrepreneurs fund and grow their own successful businesses. Find out how to get in touch with Paul and his services at www.thefundinggame.co.uk.

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