One of the most common areas of uncertainty we see with entrepreneurs pitching investors is how much they should ask for. Entrepreneurs justifiably worry that if they ask for too little they will be back looking for more 5 minutes later and if they ask for too much, they may end up scaring away investors or giving away too much equity.
One ‘belt and braces’ approach that is sometimes adopted is to talk in terms of ranges, e.g. ‘we are looking to raise between $2-4 million’. Many investors, however, will perceive this vagueness as you being weak on numbers and not knowing how much you actually need.
Make it About Milestones
Seasoned investors know that when it comes to startups, an entrepreneur’s revenue projections are as reliable as our banking institutions. A greater degree of certainty can be achieved (note that I say ‘greater degree’ rather than actual ‘certainty’) around how long it will take to achieve a key success milestone, e.g. hitting a certain number of users or making your first sale.
Once you have estimated how long it will take to achieve the milestone, the next step is to work out how much it will cost to reach it. So, let’s suppose it will take you 16 months to achieve 250,000 users. Work out your monthly burn rate and multiply that by 16. Remember your monthly burn rate will vary, normally increasing over time.
The final step is to add in a buffer for the inevitable delays that will occur. So, if you are projecting that it will take 16 month to achieve 250,000 users, ask for enough investment to cover you for 22 months, that way you can focus on achieving the milestone. This will put you in a stronger position for your next round, rather than leave you worrying about the fact that you are about to run out of cash just before you reach your all-important milestone.