At each investment round, investors will expect companies to have achieved key milestones, and to demonstrate more sales traction. A hierarchy exists for sales traction, as follows:
The higher you find yourself in the hierarchy, the better for fundraising. If you do not have at least a contract to pursue a field test, then you will have difficulty raising money from traditional venture capital firms. You will likely need to provide references from prospective customers or their proxies to attract angel and seed investment.
To develop your financing roadmap, first determine the total amount of capital your business will need until its cash flow can break even in your probable financial plan. As not everything will go according to plan, most entrepreneurs show a range of potential capital requirements, adding 10% to 25% to the top end of the range. You can also determine what successful companies have raised in similar situations.
Split the investment amount into desired rounds of financing (usually two to four rounds). Each round of financing should provide enough cash to enable you to fund your probable financial plan through the next major milestone for your business (for example, shipping commercial products to customers, entering phase II clinical trials). Again, it usually makes sense to communicate to prospective investors a range of sizes of target investment rounds.
There are factors that may affect how much investment you raise versus your target. These include:
Remember to update and adjust your financing roadmap as you achieve milestones and sales traction, as well as when the key assumptions in your financial plan change.
Thinking of raising money? We’ve created a free online course to help you get investment-ready. Check out Introduction to Investment Readiness and learn useful tips, tactics and strategies to prepare for your seed fundraising round.
Kawasaki, G. (2004). The Art of the Start: The Time-Tested, Battle-Hardened Guide for Anyone Starting Anything. Toronto: Penguin Canada.
Golden, K. (2007, March). Fail to Plan: Plan to Fail. Retrieved April 7, 2009. Presentation delivered at MaRS Discovery District, Toronto, Canada.