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Devising a Capital Strategy for Growth

FastTrac, Kauffman Foundation

The existence of the capital gap requires that entrepreneurs determine the amount of capital necessary to grow the business and then carefully consider staging investments from the appropriate sources of capital. Entrepreneurs must integrate their capital needs with the ranges of capital available from these existing sources. Entrepreneurs who need $3.5 million to achieve positive cash flow must, for example, either establish milestones that can be achieved with multiple angel rounds of $1-1.5 million or revise their capital strategy to raise a first round of, say, $0.5-1 million from angels, and then plan to grow their business even faster, necessitating a $5 million round from venture capitalists later. Going to the capital markets planning to raise $3.5 million in a single round is foolish. There are simply too few investors funding rounds of this size to justify the effort.

A bit more on milestones: Entrepreneurs seeking equity investor capital must carefully consider the milestones that can be achieved with specific expenditures of cash. Investors are most interested in measurable achievements that can be completed with specific rounds of investment and leaving the company enough runway to allow time to raise the next round of capital without running out of cash. Examples of such milestones might be:

  • First purchase order from a customer.
  • Collection of cash on first order.
  • Achieving $100,000 in bookings in a single month.
  • Delivering $250,000 in product in a quarter.
Identifying and meeting these milestones is critical to raising both the initial and additional rounds of equity capital.

© 2007 Ewing Marion Kauffman Foundation. All rights reserved.

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