What to consider when making a startup fundraising budget
Fundraising doesn't come without costs—whether in terms of hard cash or the opportunity cost of your precious time. As you navigate the fundraising landscape, identifying and managing these expenses is crucial:
To get hard cash, the costs associated with fundraising are multifaceted.
There are direct expenses such as legal fees, costs for pitch deck creation or financial models, and also fees charged by intermediaries facilitating the fundraising process. Here we take a look at some of the things startup founders must consider when budgeting for their next raise:
Budgeting for your startup raise
Assessing the Costs: The level of costs associated with fundraising increases as you aim for larger amounts. It's a prudent approach to budget between 5% and 15% of your fundraising target to cover these expenses. Let's look at an overview of the common types of costs you should consider when raising capital:
Legal Fees: This is an area where specialist expertise is paramount. Engaging a legal expert is vital when dealing with shareholder agreements, term sheets, and issuing share certificates. Mistakes in these areas can be costly. Overall legal fees can range from thousands to tens of thousands of pounds, depending on the size and complexity of your raise. It's wise to obtain quotes to budget appropriately, particularly if you plan on raising money through a venture capital fund, as your business may be required to cover their significant legal fees.
Tax Relief Schemes: The Seed Enterprise Incentive Scheme (SEIS) and the Enterprise Investment Scheme (EIS) provide favourable tax reliefs to investors. You should apply for advanced assurance from HMRC to make your startup more appealing to investors. These schemes can reimburse up to 30% (EIS) or 50% (SEIS) to investors, and additional benefits include loss relief if your company fails and no capital gains tax on exit. Investigating your eligibility for SEIS and EIS advanced assurance should be a priority given how heavily the scheme is utilised in the UK.
Investor Network Access: Depending on your strategy, there may be a requirement to pay to access investor networks or Angel Groups to present your pitch. Fees typically cover administration, due diligence, platform usage, and marketing of your deal to their network. These costs may range from a few hundred pounds to a few thousand pounds and come with no guarantees of results.
Financial Expertise: Your financial numbers are a critical part of your business story, and investors may scrutinise them closely. If you lack in-house financial expertise, it's beneficial to seek an experienced fractional CFO or Finance Director who can help position your financial model for the specific investors you want to attract. Costs can vary widely, from a financial model template that costs a few hundred pounds to hiring a professional who can charge from £500 to £5,000, depending on your business's complexity, stage, and requirements.
Additional Fees: Be mindful of other potential fees, such as equity commissions, debt commissions, grant commissions, investment platforms to list on, investor lists, broker fees, events and travel, PR, and more. These expenses can vary significantly, and you should consider their impact on your overall budget.
Incorporating Costs into Your Plan: It's essential to incorporate these costs into your financial model, particularly in your cashflow and budget. Timing is crucial, as some costs will be incurred both before and after your fundraising efforts. Managing these financial challenges may be daunting, so a clear pre-raise cash flow plan is essential to ensure you consider the timing of your fundraising and the associated costs.
By revising your budget with an updated understanding of costs, you can better determine your fundraising target. Properly managing your budget allows you to go about your fundraising journey with confidence, making sure that the expenses do not become overwhelming obstacles.
Creating your own fundraising budget using FundingHero
Beyond the tangible costs, there's a subtler yet equally significant factor— the opportunity cost of time. Fundraising is a time-intensive endeavour that demands the attention of key players within the startup.
Entrepreneurs find themselves engaged in meetings, pitching to potential investors, preparing documentation, and addressing due diligence inquiries. While each of these activities is a necessary step in the fundraising dance, they also consume valuable time that could otherwise be allocated to core business activities, product development, or strategic planning.
Effectively identifying and managing these expenses is a crucial aspect of a capital raise. Entrepreneurs need to weigh the potential benefits of securing funding against the tangible and intangible costs involved. This calculus involves not only evaluating the immediate financial impact but also considering the long-term implications for the business.
Moreover, a nuanced understanding of these costs helps entrepreneurs to make informed decisions throughout the fundraising process. It encourages a strategic approach that involves optimising the allocation of resources, negotiating favourable terms, and ensuring that the benefits derived from fundraising outweigh the associated expenses.
To begin putting your own fundraising budget together, head over to the platform - Pillar 1 covers this key area, and gives you a deeper understanding into what to consider when budgeting for your next raise.