This sponsored post is produced by Lighter Capital.
The momentous decision to seek funding to accelerate the growth of your company is often followed by nagging questions: Am I raising too much capital? Too little? Just how much funding do I need?
Securing as much financing as you possibly can is a common approach — and an understandable impulse. With more capital on hand, you’ll be able to jump on new opportunities that arise so you can respond to market shifts swiftly. This can be a huge value to your company, since launching your product or update more quickly than your competitors often means grabbing more market share, which can boost revenues and raise the valuation of your company.
Risks of raising too much capital
Despite the apparent value of having a large reserve of capital, there are certainly risks to overextending yourself, which is why Lighter Capital, for example, limits funding to no more than a third of a company’s annualized revenue.
- The more you raise, the more you need to return to investors
This may seem obvious, but it’s a point that’s easy to overlook in the euphoria of finding someone willing to give you a big cash infusion: The more you borrow or raise, the more you will owe—either in interest or sacrificed equity and control. And the more you borrow or raise, the longer it will take you to pay it back or extract value.
Venture capitalists, for example, invest with expectations of at least at 10x return on investment. This means that if you borrow $20 million dollars at a $50 million dollar valuation, you won’t be able to exit until your company has a valuation of at least $500 million dollars.
- Easy money can take you off-track
Raising too much money can lead to a lack of focus and may lead to overspending on line items that don’t help your company grow. You want to stay focused on the milestones you are trying to reach rather than on discretionary expenses.
- Not ready for growth
While we like to fund companies on a high-growth trajectory, too much growth too fast carries risk too. When you are looking to expand, make sure you’re prepared to handle success. Do you have the capacity to take on an influx of additional customers? Will you be able to continue to provide the outstanding customer service that sets your company apart? Do you have the resources to train new hires? If you’re not ready to make a big leap, consider taking a smaller step and limit your investment.
So how much is the right amount?
The answer to this question can be found in having a well-thought-out business plan and capital-raising strategy. Your business plan should give you the road map for your growth. Know what your growth milestones are in 6 months, 1 year, and 3 years. Then figure out what you need to do and how much it will cost you to go from one milestone to the next. Obviously, the further you go out, the less certain you can be. So make sure you really know what you need now and in the near future.
We think there are 6 really important questions to ask yourself when raising capital. Take the time to look these over as you formulate your capital raising strategy.
Is there a formula?
At Lighter Capital, we’ll lend an entrepreneur up to 1/3 of annualized revenue. In our experience, this is a manageable amount for a small, growing company to be able to repay comfortably over a 5-year period. Of course, it depends on what your strategy is — our model works best for those who need smaller injections of capital to fund sales and marketing and product development. If you need millions of dollars to upgrade your service or product, you might need the bigger checks from venture capitalists (and the equity and control implications that come with that).
Is there a way to tell how much we can raise?
This online funding calculator is a super fast and simple way to find out how much capital you might be able to raise through a company like Lighter Capital. By entering four simple data-points into the tool, you can easily determine the maximum amount of revenue-based financing you’d qualify for.
Whatever funding path you choose to follow, make sure you do your homework and understand all the costs, risks, and consequences. By having a thoroughly-considered business and capital-raising strategy, you can decide what path fits you and your business the best.
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