Blog

How Much Capital You Need

January 15, 2013 by Kevin Custer

CEOs and founders often say they need is $5 million to bring their company to market. In many cases, this is true, but raising that much capital for a young company is often difficult and very expensive. So, how much capital do you need to get your company to the next level?  Frequently, founders’ initial estimates tend to be high, as they think ahead several steps in their company’s development. Raising capital and selling equity is the most expensive way to build a business – equity in your company, after all, is the most valuable part of your company.  ($100,000 at an early stage buys a much larger percentage of the company than it does when you are in the growth stage.) Customer sales, loans and so on are always better than raising equity, so when it does come time to raise capital, you want to raise just enough to get to the next level and have a little cushion.  For a typical company looking to make it to $25 million in sales, here is an outline of capitalization stages and the funding you should be targeting at each level:

  • Stage 1: Prove you can build the product – friends and family funding
  • Stage 2: Prove that anyone will buy your product – friends and family funding; maybe angel  financing
  • Stage 3: Prove that enough people will buy your product to gain market traction – friends and family funding; angel financing; SBIR or local investment groups
  • Stage 4: Prove you can sell – Angel or Series A (about $1.5 million of infusion is needed to grow from $1 million in sales to the $10 million level)
  • Stage 5: Scale your business to expand your product line or sales force, etc. –  $3 to $5 million investment round

At each stage you hit, the valuation of the company increases exponentially.  Yes, it might take $5 million in capital to get you to $25 million in sales in that last stage, but rather than selling $5 million at the beginning, if you start with $250,000 at an earlier stage, $1 million at the next round and so on, you will own more of the company at the end.  And at $25 million, the next level of funding could see your business become a platform company, acquiring other companies or going through recapitalization. If your company is looking to take the next steps in growth, contact me at kcuster@arccd.com for more information on the types and levels of investment you should be targeting.

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