This month on the blog, we’re asking: how much money does my business need to grow? How much should I ask for?
Now, these are big questions and the short answer is (we’re sorry) we can’t actually tell you that. Why? Because each business situation is different and there’s no set formula for success here. BUT, we can help you figure it out for your specific situation, and here’s how.
Firstly- what stage of your business are you in?
It’s commonly thought that only startups need investment to get off the ground, but in reality even established businesses can lack the funds to grow, expand or change their business. And whilst it might be daunting to start out on this road to growth, it’s important to ask yourself- in the words of Jemma Ross, Business Loan Broker and General Manager at Spinach- "What is the cost of not taking the money?".
How much investment should I ask for?
When determining how much capital to ask for, think about your funding needs over the next 12 to 18 months. This time frame allows you to focus on achieving your near-term goals, such as product development, customer acquisition, and revenue growth, while also leaving room for additional funding rounds if necessary.
Which areas of your business need investment?
An investor might be hesitant to open their wallet if you can’t show them how you specifically intend to use the funds.Here are some steps to help figure out where you’ll spend the money:
- Assess your business thoroughly: This applies if you have an existing business and want to grow or expand. Evaluate your business operations and point out areas that need improvement. This could include increasing marketing efforts, upgrading equipment, or hiring additional staff.
- Priorities first: Once you know the areas that need improvement, group them based on their significance to your business' success. For instance, if it's a tech company, your top priority will be an investment in research and development.
- Create a budget: develop a budget outlining the costs associated with each area. Include necessary expenses such as equipment, labour, materials, and overheads.
What will you give up in exchange for the cash?
Something also worth considering is the equity stake you are willing to give up in exchange for investment. If you’re asking for a significant amount of capital, you may need to give up a larger percentage of equity to investors. Is this something that sits comfortably with you? This decision should be made carefully, as giving up too much equity can limit your company's control and potential for future growth.
Two more options for what you can exchange for the cash:
- Board seat: Some investors may request a seat on your board of directors— this will give them a say in the decision-making process, ensuring that their investment is used wisely.
- Collateral: This may include a personal guarantee or a lien (an official order that allows someone to keep the property of a person who owes them money until it has been paid) on your business assets.
The value of your business as it stands today.
In addition to considering your funding needs and equity stake, you should also be realistic about the valuation of your business. While it may be tempting to go for a high valuation, this can make it more difficult to attract investors, especially if the company has not yet generated significant revenue or proven its business model in the real world.
Ultimately, the amount of capital your business should ask for when seeking investment depends on your specific funding needs, your growth potential, and the equity stake you’re willing to give up. By carefully considering these factors and seeking the advice of experienced advisors, you can determine an appropriate funding amount that will help you achieve your near-term goals while also setting you up for future success.
The next steps
Once you have a handle on how much to ask for, the nitty gritty work begins. The investment process typically begins with the startup (or existing business) creating a pitch deck, which outlines the company's business plan, target market, competition, financial projections, and other key information. The startup then pitches the deck to potential investors in the hope of securing funding.
This is where InvestaMatch can help- we have a prolific community of advisors who can help you on this path and get you pitch-ready. So if you’re looking for external investors for your business idea, or are planning to invest in a business opportunity, InvestaMatch NZ's online investment directory is here to help.