Determining how much money to raise for a startup can be challenging – especially if the startup is seeking pre-seed or seed funding. Even once the company has calculated the operational costs to reach the next stage of growth, there are additional factors to take into consideration when deciding the minimum and maximum investment goals. In this blog, learn the investment amount restrictions and key considerations when deciding how much money to raise.
Obtaining capital is a part of any startup. Whether offering equity, obtaining debt financing, or otherwise finding the capital to help grow revenue, money is a necessary part of growing a business.
The amount of money and the ways by which the capital is acquired typically depends on the company’s size, stage, industry, and current market traction. Each circumstance is unique, and some of the reasons a company may decide to raise capital include:
- The company has the desired market traction for its flagship product and needs additional capital to branch out into new products
- The company has localized market traction for its existing product line and desires to reach new markets
- The company has market traction, cannot keep up with the current demand levels, and needs to purchase additional equipment and/or hire new employees to help sustain the existing growth
There are many reasons why a company may choose to raise capital, but there are also some limits to the amount of capital that can be raised.
Some of the exemptions through which a business can conduct a securities offering include provisions that limit the maximum offering size within a 12-month period. Under Regulation Crowdfunding, the maximum fundraising limit is $5 million within a 12-month period. Previously, Regulation Crowdfunding was limited to $1.07 million within a 12-month period, but the SEC increased the limit as part of a larger initiative to update certain registration exemption provisions in early 2021.
While Regulation D rules 506(b) and 506(c) do not have maximum fundraising limits, Regulation D’s Rule 504 sets a $10 million fundraising maximum within a 12-month period. Both tiers of Regulation A+ have maximum limits, with a $20 million limit for Tier 1 and a $75 million limit for Tier 2. Tier 2 was previously capped at $50 million but was increased at the same time as the Regulation Crowdfunding limit was increased.
When determining how much to raise, it is important to consider these maximum fundraising limits to help decide which provision to use, time capital raises, and set the minimum and maximum capital goals.
There are a few key considerations to review when determining the amount of money your startup needs to raise.
One place to start is with current and projected cash flow. Understanding how money is currently generated and spent can help give an idea of how the cash flow may need to change in the future. Once a founder understands how much money is spent on current operations, these numbers can be used to help project how much money will need to be raised to sustain future growth.
While many earlier-stage startups do not focus on valuations because of the lack of historical financials and growth predictions, it is important to be aware of your company’s value. As a company insider, it may be easy to overinflate the company’s value, which can deter potential investors from participating in the round. While it is more difficult to calculate valuations the earlier stage the company is, a higher valuation is not always better than a lower valuation.
If your company plans to raise capital through a broker-dealer or funding portal, it is important to take platform fees into consideration. Many registered broker-dealers and funding portals take either a flat rate fee or a percentage of funds raised as compensation for hosting the raise. These costs should be built into fundraising goals so funds received to accomplish a specific goal are not reallocated to cover platform fees.
Marketing & Advertising Costs
With Regulation Crowdfunding and other provisions that allow general solicitation, you may want to build in the costs of promoting and advertising the raise. Whether sponsored ads on social media or hiring a third-party to do direct outreach, marketing and advertising costs could be important to consider when deciding the amount of money to raise.
The Value of Equity
If a company decides to offer an equity round, the cost of the equity needs to be factored into fundraising amounts. With considerations like dilution, the amount of money you raise directly impacts ownership percentages for existing and future investors.
There is not a one-size-fits-all method for deciding how much capital to raise in a funding round. Specific circumstances, dependent on the issuer, potential investors, and the company’s market value, all play a part in affecting the amount of money projected to be raised. Founders should be aware of the factors that could affect funding rounds, and it is typically suggested to account for unpredictable future events. It is also important to consider potential investors may want to see the use of funds up front to understand how their investment money will be spent. There are many factors to consider when determining the right amount of money to raise in specific circumstance.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
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