MBA2202 How Much Money Should You Raise For Your Startup + Free Ride Friday

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Hey oh welcome to the Hundred Dollar MBA show. The place to be to build a business you want every single day with our daily 10 minute business lessons for the real world. I'm your host, your coach, your teacher Omar Zenholm. I'm also the co founder of Webinar Ninja, an independent software company. I started my co founder back in 2014 and today's free Ride Friday. On Free Ride Fridays we give away a lifetime membership to one of our programs. We're giving away the $100 MBA. All you got to do is leave us an Apple podcast rating and review and you enter our weekly random draw to win a free ride to our program. Listen in on Friday, just like today, to see if you won. It's that easy. We announced this week's winner a little bit later in the episode. In today's episode you will learn how much money should you raise for your startup. You might have started a business. It could be a software business, a service based business, a product business. You have product market fit. You're ready to hit the market and go guns blazing. But you want to raise some capital so that you can do it properly. Many people ask hey, how much money do I need to give my business the boost it needs to really start growing on its own? Well in today's lesson I'M going to share with you a framework that you can use to work out what that number is for your business. And too many people live in their head and I'm in awe about this and don't have a clear plan of action to know exactly how much they need to raise so they can know how much equity they have to give up. So let's get into it. Let's get down to business.

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I want to start today's lesson by making sure we're on the same page here. When you need to raise capital for your business at whatever stage you're at, many people start with how much equity they're willing to give up. And they work backwards. And that's just simply wrong. That's not a good strategy to take on because it's not actually about how much equity you need to give up. It's actually about how much money you need to have a successful business because you're obviously raising capital because you need the cash to take your business to the next level. And there's no point in raising capital if you don't raise enough capital. The secret here is raising just enough capital to take you to that point where you have escape velocity, where your business is growing with your new hires, your new system, your new funding. That way you give up just enough equity in exchange for that capital. So let's start with the number first, how much money you actually need and not how much you're willing to give up. I know a lot of founders are like, well, I only want to give up 10%. I only want to give up 20%. You actually see this a lot in that show Shark Tank where they're like, no, no, we don't want to give away more than 20%. Well, it's not about how much you need to give away or how much you're willing to give away. It's about how much money you actually need. Because the money and the percentage of equity that you're going to give up is all correlated to the total value of your company at this point. And if you're pre revenue, it's very hard for you to really shoot for the stars when it comes to valuation. Now obviously, if you have some customers, you have some revenue. Now we're talking now we have something that's proven and you're able to give your business a little bit of a higher valuation. Then you could say, for example, okay, my business is worth 10 million. I need $3 million to take my business to where I need to be to have the right growth engines installed. That means I need to give away 30% of equity. So let's figure out how much money that is for your business, regardless of the valuation. Because what you might find out is this is not the best time to raise because you might need to grow a little bit more so you can have a higher valuation, so you can get the money that you need to take yourself and your business to the next level. So this is how you come up with this number. You start with a blank check. You start with a clean slate. You need to really ask yourself, what are the things you need in your business right now to reach the goal you have in mind? So say, for example, you have the goal to make $3 million a year, and maybe your business is only doing half a million dollars a year. What are the things you'd have to have in your business so that you can hit that target? Let's say, for example, you are a software company, and in order to hit that target, you need to build out new features or new products or add ons expansion revenue ideas that you can charge more for your customers so you can reach those growth goals. That's going to require you to maybe hire some engineers. How many engineers are you going to be able to do that? Well, how much time do you have? If your goal Is to hit 3 million in 12 months, you don't have much time. That means you're going to need a lot of hands on deck. Now, if you have two years to hit 3 million, you have a bit more time and you can start planning out. Okay, I need X amount of engineers. This is how much these engineers cost on an annual basis. I might need a project manager as well to manage all these projects. And if I'm developing my product consistently, I'm probably going to need a QA engineer, somebody to make sure that the quality of the product doesn't suffer as you're adding new features, new aspects, new types of functionality. Because every time you add to your business add to your product, the more complex it gets, the more chances there are for failure. So you add up all the annual salaries for all these hires you need to make and you have a number. Put that number aside. What else do you need? Well, you can't just have a great product and talk to nobody. You need to market, right? So how much money are you spending on marketing now? Well, maybe you're not spending any money, or maybe you're spending very little money. Like, let's say you're spending $10,000 on marketing right now. Yeah, that is actually very little money in the software world. In marketing. Well, you're gonna have to 6x that marketing budget if you want to 6x your revenue at least. So you're talking about $60,000 every single month. You're gonna need somebody to manage your marketing, somebody who's gonna be running your ads and managing your campaigns, maybe even somebody who's gonna manage your content partnerships and all that kind of stuff. So the point here is that you're gonna make a laundry list of every. Every hire, every expense. Maybe you need to upgrade your infrastructure. Maybe you need to spend more money on a bigger office. If you have a physical office and you're hiring more people. Maybe there's legal fees when bringing in new hires, all the fees, everything. You're gonna have to spend and work out how much money you need to just run your business on just the investment money for two years. You need that much money. That's the number you need to raise. You want whatever your goal is. If your goal is to hit X amount of money by X amount of years, then you need that many years that X. So in the example I'm giving is two years. Then you need two years of Runway, two years of your expenses paid so you can comfortably hit your goal. Now remember, there's going to be roadblocks. There's going to be things that are not going to work out. You're going to have distractions and challenges along the way. And you may not hit your goal, but if you get close to your goal, and let's say you don't hit the $3 million mark a year, but you're at like 2.2 million, well, you more than 4x the value of your company. Now, your company is worth, let's say, 40 million. You can raise another round with this new valuation and inject cash again into your company and reach new goals. Now, what you don't want to do is you don't have this bootstrap mentality or this let me try to do it on the cheap mentality. When you're raising capital, the whole point of raising capital is that you're accelerating your growth. Bootstrapping is that you gotta be conservative with your money. I know, because I bootstrapped my businesses and your resources and try your best to do with as little as possible. That means Slow growth. Now, when you take on investment, most investors want a return on investment. Makes total sense, right? And they probably want one as fast as possible. They want to see growth, they want to see progress. They want to see that they gave you money and now the company is making more money. Because guess what? When you raise that next round at a higher valuation, their first investment is worth more. Come one day when you sell the company, you're going to give those investors a nice healthy payout. So when you're raising, you want to make sure you're raising with plenty of money, even if it means you have to have a little bit of a negotiation on your valuation so you can raise more capital. Now this is a great exercise to do anyway because now you have a plan of action. You actually have an idea of what you're going to do with this money. It's the first question these investors are going to ask you, like, hey, what are you going to do with the cash you raise? How are you going to reach the goals that you have set out in this pitch deck? Having clear goals, clear hires, clear allocation of funds. They're going to have the confidence that you're not going to waste their money and not going to go out of business in a few months. They see somebody responsible, they see a planner, they see somebody who has a vision and has a plan for that vision. Now your job is to walk them through how you're going to get to that goal with their funds, how you have what they need and they have what you need. It's a partnership.

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To wrap up today's lesson, a few more tips. When it comes to knowing how much to raise. In this whole process of raising capital, the reason why it's so important to know your number, how much money you need to raise, is that now you're laser focused on that amount. I need to raise $2 million, for example. If that's your number, then your goal is to get $2 million. You can get that in different forms. You can get that through smaller investors or one big investor along with three or four smaller investors cutting smaller checks. As long as the total is 2 million, you are good. You might have half of it investors and half of it debt financing. And in this case, the debt financing won't cost you any equity. The point here is that once you have a number, now you have a gift. Now you have clarity. Now you know exactly what your goal is, no matter what it takes, how many people, what split. You need this money so that you can hit your goals. Now, having investors is totally different than not having investors in terms of running your business. Now you're going to be held accountable. When you ran your own private bootstrap business, you were your only boss. You were the only person that you needed to answer to. But now that you have investors, they're going to want to see reports. They're going to see how you're progressing. If not on a monthly basis, they'll be at least at the quarterly basis. But most investors seed, pre seed, or even series A, they're going to want to hear from you on a regular basis, at least monthly, to know how you're progressing, what do your numbers look like, how's it going in terms of spending the money?

What do you.

Have you made those hires yet? Have you found a way to market efficiently with the marketing budget you set out? They don't want you to be just sitting on the cash. They want you to be able to put it into action. Because, believe it or not, that cash loses its value every month. That goes on because of inflation, because of all these different reasons, but most of all because you're losing time. They're like, hey, we gave you the cash so you can start implementing immediately. Now, obviously, you don't want to make hasty decisions, but once you've kind of allocated the cash to the right things, your investors are going to be much happier. They're going to feel like, okay, they have the Runway. They already set out the budget for the next two years. They've already made the hires they need. They have their marketing strategy down. They have somebody for marketing who's going to implement it. Their leads are growing, their sales are growing. We made the right choice by investing in this business. So it's critical that you actually perform well in the first month or two or three, especially that first quarter when you get that investment. This is an exciting opportunity. This is a great time for you and your business. But it's also a critical one. It's one that you really need to have your full attention. So this kind of goes without saying, but I'll say it. This is going to be an intense few months, meaning you're going to take very little time off, no holidays. You're going to be working probably as hard as you ever worked before, so that your business kind of catapults really builds up steam. So it's set up for the next few months, few years, so that you can hit your financial goals and show your investors that you are worth that investment. Thanks so much for listening to the $100 MBA show. If you love what you hear, hit subscribe, hit follow on your favorite podcast app so you don't miss a beat. By just doing that, you you help us tremendously get some exposure and tell other people that, hey, check out this podcast. So if you could do that right now, hit follow, hit subscribe on whatever you're using right now to listen to this podcast. I would really appreciate it. Thank you so much for doing that. Today's episode's not over though. It's Free Ride Friday. Let's see who won this week's Free ride. And the winner is one Bison. One Bison says on Apple Podcasts on point five stars. A very informative show and relevant items that really benefit entrepreneurs. Thanks on Bison for that great review. Your mission is to email me at omar00mba net so I can hook you up with the free ride to the $100 MBA. If you want to win a free ride too. Just like our winner today just did, go ahead and leave us a rating and review on Apple Podcasts. By doing that, you enter our weekly random draw we call Free Ride Friday. Listen in on Friday, just like right now to see if you won. It's that simple. And as soon as you leave us a review, just you enter our draw every single week until you win. It's our way to say thanks for showing us love on Apple Podcasts. Before you go, I want to leave you with this. Raising capital can take time. You're going to have to pitch a lot of investors. You're going to have to tell your story. You're going to have to find your story. Don't get discouraged. You're going to find somebody that's going to understand what you're trying to do. If you have a strong enough business and model and plan ahead, the right partner is going to show up eventually. And if you're still struggling, take a look at your business model. Take a look at what's going on. See if you can get some sales in the door so you can prove this business is actually viable. Listen to the feedback you're getting from investors that are saying no and find out why it's not a good fit. Make those tweaks, make those changes, and go back in the market. Thanks so much for listening and I'll see you in Monday's episode. I'll see you then. Take care. Of.

We know you'll always find ways to look out for the people you love. And with Amica Life Insurance, we'll help build a plan to make sure you always can. Visit amica.com and get a quote today.