As an entrepreneur, you’ll need to examine many factors when establishing the total amount of capital required for your startup, and the amount you’ll need to meet the next milestone.
When identifying the necessary amount of funds, make sure you plan for enough capital to get you six to twelve months past your current milestone. Schedules often slip for a variety of reasons and you don’t want to be running out of cash while you’re on the verge of completing the milestone. Nor do you want to be raising capital when you’re out of cash— this puts you in a vulnerable position with current and potential investors. Plan for this contingency as you will find that you will spend more money than you think.
Bear in mind that the total amount of capital you raise should get you to top-line revenue or profitability.
The amount of cash you need to raise to fund your startup will also depend on the rate of growth you would like to achieve. If you decide to grow slowly and fund the business with the revenue you generate, you will need less cash than if you want to accelerate your growth.
Remember that in every industry the rate varies at which a business can grow and reach target revenues. As an example, a recent benchmarking study on the software industry concluded that it took on average of five years for an emerging software company to reach $10 million in revenue. High growth rates can be achieved, but it will take significant levels of expenditure to reach them. In fact, to accelerate growth to hyperlevels, firms should expect to spend two times their revenue on operating expenses.
Once you establish your financing strategy, it is time to look at financing options. In the short term, you may want to consider bootstrapping your idea.
Plant, C. The path to success: Strategic Benchmarks for Software Companies, Q3 Capital.