Raising Capital Begs the Question,
"How Much Money Do I
ask For”?

A common question when looking for angel capit funding is “How much money do I ask for?” There are several factors to examine in reaching an answer to this question.
In a perfect world, you should ask for the amount of money that is needed to get you from where you are to a point where you do not need to raise any more capital: sufficient revenue and profits to cover all costs of operations, ongoing research and development and a rate of sales growth to match the competition.
If this amount of money is greater than $5 million, than it is unlikely that any single angel or group of angel investors will be able to provide the money you need. A small request will be necessary. To determine the lesser dollar amount, make a list of all of the milestones that you expect to accomplish with the money you need. Put a price tag on the cost to accomplish each milestone. When your shopping list gets to $5 million dollars the list is complete. Make your pitch that you will accomplish each of the milestones with $5 million.

Example A
ABC Company Milestones Projected Cost
Develop product $2,000,000
Obtain FDA approval $1,000,000
Manufacture product $2,000,000
Sell product $4,000,000
Total $9,000,000

In this example, the business requires $9 million in order to attain sustainable operations. However, this amount exceeds the $5 million that might be raised from angel investors. Therefore, the business will seek to raise only $5 million and will commit to achieve only the first three milestones.
If the amount of ownership in your business that you must give up in order to receive the $5 million in funding is more than 100%, than you need to set your sites on a lower target. Like the previous example, make a list of all of the milestones that you expect to accomplish with the money invested. However, this time, instead of a price tag placed on each milestone, place a figure that represents the reduction of risk. For example, if the chance of your success is presently 1 in 10 (10%) and the probability of success climbs to 5 in 10 (50%) upon completing your first sale, than you should put 40% (50% less 10%) beside that milestone. After you have completed this analysis, look for that milestone that decreases your risk of failure and improves your chance of success the most. Now count up the cost to accomplish all of the milestones up to and including the most important milestone. Ask for this amount of money in exchange for less ownership in your business, knowing that you will have to ask for money again when that milestone is achieved. However, with a significant reduction in risk, when you ask for money the second time, the cost of money will go down and you will have to give up even less ownership. Between the first and second funding, if you give up less than 100%, then you have successfully two-stepped to success. If you can two step, consider doing funding in three, four or even five stages with each step matched to significant milestones that represent risk reduction in order to maximize the amount of ownership in your business that you keep.

Example B
ABC Company Projected Cost Risk Reduction
Milestones
Develop product $2,000,000 10%
Obtain FDA $1,000,000 60%
approval
Manufacture $2,000,000 10%
product
Sell product $4,000,000 30%
Total $9,000,000 110%

In this example, substantial risk reduction is achieved when the business obtains FDA approval to sell its products. Therefore, the business should seek to raise only $3 million and achieve that milestone. By seeking a small amount of money, the founders should be able to keep some ownership in the business. When it seeks to raise additional money after obtaining FDA approval, the remaining risks are much smaller and the founders should still be able to keep some ownership in the business after the second round.

Example C
ABC Company Projected Cost Risk Reduction
Milestones
Develop product $2,000,000 30%
Obtain FDA $1,000,000 50%
approval
Manufacture $2,000,000 20%
product
Sell product $4,000,000 30%
Total $9,000,000 130%

Like the last example, substantial risk reduction is achieved when the business obtains FDA approval to sell its products. However, the founders of the business may elect to complete four funding rounds – one for each major milestone. Therefore, the business will seek to raise only $2 million and complete product development, then $3 million to obtain FDA approval, then $2 million to set up manufacturing and create inventory and finally $4 million to launch sales. By seeking smaller amount in each funding round, the founders of the business may keep a larger ownership share. However, they run the risk that they may have difficulty in raising money in the future and they will have to incur the time and costs of raising money four times.
If the failure to complete the first milestone will result in a 100% probability of failure in your business, then it is appropriate to limit your request for money to the projected cost of completing that milestone. There is no point in raising more money that you will need if the first milestone is not met.

Example D
ABC Company Projected Cost Risk Reduction
Milestones
Develop product $2,000,000 100%
Obtain FDA $1,000,000 100%
approval
Manufacture $2,000,000 10%
product
Sell product $4,000,000 100%
Total $9,000,000 310%

This example presents a high risk deal where there are multiple killer milestones. One approach is to raise only $2 million and try to achieve only the first milestone. Another approach is to raise all of the money and simply return any unused money if any milestone is missed. Yet another approach is to raise the first $2 million with a commitment from the angel investors to provide the rest of the money as needed, when needed as each milestone is met. Each approach will be difficult because of the high risk of the venture. The outcome or potential return on investment will have to be correspondingly high to get angels to gamble on the deal.
If the investor has a limit on the amount of money that they commonly invest in a deal, ask them for that amount and for an introduction to other investors who they know and whom they have invested with in the past. You may need to take a commitment to provide funding or put money in escrow until you have obtained enough funding to hit your milestones.
The business should expect to look to different sources of capital as it progresses from start to finish. Some angel investors like to get in on the first round with the expectation of the highest upside on their investment. Other angels are more cautious and may require completion of some critical milestones before putting their money at risk. As the risks are reduced, the nature of the investment may change from equity to debt. At some point, the business should qualify for bank or other financing with a lower price of money.

Karl Dakin
Karl Dakin LLC
7148 S. Andes Circle
Centennial, CO 80016
Info@KarlDakin.com
www.KarlDakin.com

Mr. Dakin is a seasoned veteran of the investment community and a serial entrepreneur who is always raising money. With 27 years of experience in launching new businesses, Mr. Dakin now designs, mentors and manages startup companies.