A guest blog
How much is too much?
*Question*: Suppose I have a business proposal or idea that I believe *can yield over a hundred million dollars per annum ($100m)* if well established
But at the moment still at ground zero because of funding – and currently seeking a funding of about *$12m from a venture capital,* how many percent shares can I give up for that amount?
One of the most common and deadly mistakes entrepreneurs make when they’re asking for capital *is asking for too much*
And if you want a potential investor to take you seriously, this is not a mistake you want to make.
*But how much is too much?* How can you know the amount of capital you’re asking for is too much?
Now, there are *3 important factors* that usually determine how much capital you should ask for
1) *The first factor is the stage of your business*
As you already know, there are 4 stages in the business lifecycle. They are the *Idea/Pre-startup, Startup stage, Growth stage, and the Maturity stage*
The amount of capital you can ask for increases as your business progresses *from the Idea stage to the Maturity stage*
And there’s a logical reason for this.Compared to other stages, a business in the Idea stage is not yet *proven or validated*.
It may not have a *ready product to sell, or even have any customers* at all.
These are exactly the features that make Idea stage businesses *very risky in the eyes of potential investors*
And it makes sense. Compared to investing in a growing or mature company, *an investor is more likely to lose money in an idea or start-up business.*
That’s why investors don’t place a lot of money on idea or startup stage businesses.
The range of investment for this stage is usually between *$1,000 and $1 million* – depending on the sector
That way, even if investors lose their investment, the losses are not that devastating.
So, if your business is in the idea or startup stage, and you approach a potential investor for *$12 million*, they’ll either laugh you off or stop taking your calls.
Of course, *there are exceptions to this rule* and I’ll explain in the next point.
2) *The second factor is your track record as an entrepreneur.*
Yes, some entrepreneurs can raise a lot of money even if they’re only in the idea stage or startup stage.
If you have a *proven track record of success in other similar projects or businesses*, then that could reduce the risks of your idea in the eyes of a potential investor.
Let’s say, for example, that you’re a real estate entrepreneur and you’re trying to raise *$100 million* for a shopping mall project idea you have. $100 million is a lot of money for a person who has only an idea, a design, or a business plan.
But your advantage in this case is you have *successfully completed 3 shopping mall projects in the past*
That *track record of success* will make potential investors see you much differently.
And even though your project is only in the idea stage, you’re likely to raise the $100 million you’re looking for.
*Your reputation, credibility or track record* in similar businesses will very likely give you a strong lead over other entrepreneurs in the idea stage who do not have hard experience.
3) *The third factor is the type of investor you’re talking to.*
There are different categories of investors; depending on the amount of capital you’re looking to raise.
For example, most *angel investors* invest within the $10,000 to $250,000 range.
For venture capital, it’s usually between *$1 million and $10 million*, or more.
For private equity, it’s from *$10 million to $100 million*, and even more.
*Angel investors* usually focus exclusively on idea and startup stage businesses – they are also very hard to find.
*Venture capital investors* only invest in growth stage businesses.
*Private equity investors* domain is usually mature businesses.
So, before you approach a potential investor, you need to be sure you know what *range of capital* they can provide, and the *business stage & sectors* that they focus on.