How much capital do you need?

Before you start looking for money, you need to know how much you need and what it is for. One of the most common mistakes early-stage founders make is raising too much or too little — or raising at the wrong time. This lesson helps you work backwards from your goals, so you know what kind of financing you are actually after.

Separating operations, growth and investment

Not all capital does the same job. It pays to distinguish between three kinds of need:

• Operating capital covers the running costs that keep the company alive: salaries, rent, software and supplies. This is the money that burns every month whether you grow or not.
• Growth capital is used to accelerate something that already works — more salespeople, more marketing, new markets.
• Investment is a one-off purchase of something lasting, for example equipment, a machine or building a new version of the product.

When you blend these together in your head, it is easy to underestimate how much you really need. Lay the three categories out separately before you settle on a number.

Runway and milestones

Runway is how many months the company can operate before the money runs out, given today's spending (burn rate). The maths is simple: cash in the bank divided by monthly net spend.

The point of a funding round is rarely just to survive longer. It is to reach a milestone that makes the company more valuable — for example a working base of paying customers, a finished product or proven sales in a new market. Think of capital in chunks: each round should buy you enough runway to reach the next milestone with some margin. A common rule of thumb is to raise enough to reach a clear milestone plus a few months of buffer, so you are not forced back out to raise from a weak negotiating position.

Bootstrapping vs. external capital

There are two basic paths, and most founders combine them.

Bootstrapping means funding growth with your own money and revenue from customers. You keep full control and all the ownership, but growth is limited by what the company itself earns. For many service and software companies this is a perfectly viable strategy — and some of Norway's most solid small businesses have never raised a krone from outside.

External capital — grants, loans or equity from investors — lets you grow faster than revenue alone allows. The price is that you give something away: interest and repayment on a loan, or ownership and influence with equity.

There is no single right answer. The question is whether your market demands speed (where external capital can be decisive), or whether you can build patiently under your own steam.

Dilution — what external capital costs you

When you raise equity, you sell new shares in the company. That means your own stake gets smaller — you are diluted. Owning a smaller slice of a larger, more valuable company can be a very good trade, but only if the capital actually creates more value than the dilution it costs.

A simple example: Maria owns all of her SaaS company in Trondheim. She brings in an investor who puts money in for new shares, and after the share issue she owns a lower percentage. If the capital helps her triple the value of the company, the smaller stake is worth far more than the whole company was before. If, on the other hand, the money merely extends runway without moving the company forward, she has given away ownership without getting enough in return.

Always calculate two things at once: how much capital you are raising, and how large a share you are giving up to get it.

Do this now

Set up a simple spreadsheet with three columns: operations, growth and investment. List your actual costs in each column for the next twelve months. Then work out your monthly burn rate and how much runway you have at your current balance. Finally, write down the one milestone the next round of capital should take you to. If you do not have a clear milestone, you are probably not ready to raise yet.