Jannis Friedag, Investment Manager at bmp, about the right amound of financing which you should seek.
Summary: the amount of financing to pursue depends on many different and sometimes individual influencing factors. The first important factor is the cash reach; as a rule, the money should last 15 months – appropriate milestones (customers, development objectives, etc.) should then be reached during this period in preparation for a further round. It is also important not to give up too many shares in early rounds and it is worth finding out which investors are currently investing in the respective company stages and at what ticket sizes.
At bmp Ventures we talk to company founders on a daily basis – often about the financing of companies. The question of how much money they should raise frequently arises in this context. Unfortunately, there is no one right, one-size-fits-all answer to that, but in this blog post we hope to point out a few influencing factors.
Firstly, you must of course prepare a financial plan to determine how much money you are spending and what you are planning to earn. When doing so, many founders unfortunately underestimate how difficult it can be to generate revenues in the initial stage and forget a few costs. Don’t be too optimistic here.
Your business plan shows how much money you need per month as start-up financing. Some business models require a very long time to reach cash break-even. However, VCs don’t usually invest multi-million sums in early company stages right away. As a basic rule, you should be able to make the money last at least 15 months, otherwise you’ll soon have to worry about new money again and won’t be able to concentrate on the business.
You’ll go through various major milestones while developing your company: the first beta version, the first major customer, 10,000 users or successful clinical trials. In the second round of financing you’ll be judged by your achievements to date – you should therefore raise enough money in the current situation to enable you to show a track record and then enter the talks in a more comfortable position – it’s easier to negotiate based on successes!
Valuations tend to be lower in the early company stages – for an identical investment you therefore have to give up a considerably higher percentage of the company or additionally conclude a silent partnership. As a general rule, VCs like to see teams in which the founders are still motivated to go “full throttle”. Accordingly, we also want you to hold considerably more than 50% of the company. You should also keep in mind that there will probably be further rounds of financing in which you’ll be diluted further – and your share thus reduced.
Offer of funds
You should also look at the party you are talking to when raising money. Business angels generally tend to invest five to six-figure sums. Venture capital companies usually have minimum investment amounts – generally EUR 0.25 or 0.5 million in the early stages. Smaller investments are difficult for VCs to map from the point of view of administrative expenses, as the cost of examining and supporting the enterprise is the same as if we are investing EUR 1 million. Our investments start at EUR 300 thousand, for example.
As you can see, you should include several factors in the decision-making process. Equipped with the finance plan, a product roadmap and a little knowledge of current financing rounds on the market, it is possible to develop one (or even several) scenarios that can bring a company to the cash break-even point.