Planning, Startups, Stories


Tim Berry on business planning, starting and growing your business, and having a life in the meantime.

How Much Money Do I Need for My Startup? 7

It’s an obvious question. And if you’re looking for startup investors you’d better be able to answer it well, and quickly too. No wandering eyes. No doubt. If you’re doing a pitch, have a slide for it. And be specific.

I liked this from Ben Yoskovitz’s Instigator Blog on Use of Funds:

most descriptions of “use of funds” are incredibly generic and standard, typically involving the following: hire key personnel, product development, sales & marketing. Hhhm…the phrase, “No shit Sherlock…” comes to mind.

And on the other hand, there’s this about that, from Perfecting Your Pitch, by Guy Kawasaki’s Garage.com Ventures:

It should be clear from your financials what your capital requirements will be. On this slide you should outline how you plan to take in funding—how big each round will be, and the timing of each—and map the funding against your key near-term and medium-term milestones. You should also include your key achievements to date. These milestones should tie to the key metrics in your financial projections, and they should provide a clear, crisp picture of your product introduction and market expansion roadmap. In essence, this is your operating plan for the funds you are raising. Do not spend time presenting a “use of funds” table. Investors want to see measures of accomplishment, not measures of activity.

So go figure. There are two opposite points of view from two good sources.

I’m amazed, meanwhile, how often I see people pitch startups to investors without having a good answer to that question. I expect an instant answer, without hesitation, and if it’s a slide deck there should be a slide.

And that doesn’t mean that anybody necessarily believes what you say. It’s all educated guessing. But details add credibility. And if you can’t answer that question, what do you think your audience is thinking?

There is a standard way to calculate starting costs.

  1. Make a list of the stuff you need to purchase before you start. Include expenses like early salaries, cleaning up the location, developing the website, packaging if relevant, prototypes … it’s a collection of educated guesses, of course. It’s just guessing, but how can you not do it?
  2. Do your projected first year cash flow. Estimate sales, costs, expenses, and payment lags from business customers, your own lags paying your vendors, plus what you need in inventory. If this isn’t a cash deficit, recalculate. In real startups it almost always is.
  3. Add those startup costs with the deficit spending, and that’s what you need from investors.
  4. Reality check: if that calculated amount is way too much, investors will laugh at you, go back and change your plan. Spend less. Look for the startup sweet spot.
  5. Double reality check: if you can spend less, maybe you can do it without investors. There are other ways to get money. But even in that case, don’t you want to have a good idea of what it takes?
  6. Triple reality check: if you’ve got a high-end high-tech startup, looking for serious angel or VC investors, give them a break and show spending the money on things that make for growth, excitement, virality, sizzle. If you don’t know what that is, rethink your plan.

(Image: mgkaya/istockphoto.com)

  • http://berislav.lopac.net Berislav Lopac

    This makes sense for those startups which can start making money in their first year; the startups doing more base technology, which need more to develop their products, need more runway.

  • Chelle Parmele

    Thanks Tim!

    I was trying to figure out how putting “We’ll buy Voodoo Donuts every Wednesday” into the pitch was going to sparkle for the VC’s. :)

  • http://thesiestaguesthouse.com/ Nathan Gustafson

    Saw you at Perugino’s this morning. I didn’t want to interrupt, so I am commenting here. Thanks for the recent posts on alternative funding methods. When you get a chance, I would love to hear your thoughts on drumming up pre-sales for a concept (near or before the seed investment stage) without it coming across as selling vaporware and with the goal of landing the first couple customers and/or seed funds…

  • http://instigatorblog.com Ben Yoskovitz

    The key point for me is that you need to have thought about use of funds seriously, and the goals for the money. Saying “we’re going to hire people” isn’t good enough.

    Whether you put this into your pitch deck descriptively isn’t the key issue; but investors do like to see and understand an entrepreneur’s thought process around one of the most important issues in the startup – how they’re going to spend the money they’re about to get.

    Money and milestones are tied together. In fact I think Guy and I are saying the same thing – don’t just list use of funds – build a model that shows what you’ll spend money on, why (have some justification), and how it ties to goals/milestones.

    • http://timberry.com Tim Berry

      Ben, thanks for stopping by, and I like your synthesis. That makes perfect sense.

  • Chelle Parmele

    Tim, I’m curious about this ” show spending the money on things that make for growth, excitement, virality, sizzle.”

    Can you explain a little more what you mean there?

    I’m taking it to mean you want to show in the pitch how you’re going to make the business a fun and exciting place to work, and in return – retain the people you hire.

    Is that correct?

    • http://timberry.com Tim Berry

      @Chelle, thanks for the comment, but no, I was talking about investor excitement. Investors want excitement, virality, and sizzle. Fun and exciting place to work and retaining the people you hire is always good, but the sizzle factor in an investment pitch is about riding the trends and catching the wave just right. As I’m writing this I’m thinking one recent example, the pitch I heard (twice) this spring from Kalood, which was resonating the trendiness of social media and groupon at the same time. That’s sizzle that investors like.