Everything takes longer and costs more than you think it will. However, everyone should know this already and most companies allow for this to degree (not nearly as much as they should do) and I’ll write an article about this at a later stage. However, this post talks about the fact that you can’t spend all of the money that you raise and therefore you need to raise more money – confused yet?
When you raise funds you do it to invest in your company. As you invest you increase the company’s cost base (salaries increase, you move offices, etc.). As your cost base increase so does the buffer of cash you need to ensure you can meet those cost without interruption (failing to meet payroll is a very bad thing).
Let’s say you raise €2 million to grow your software company. A few programers here and a sales team there and before you know it you have a payroll of €150K and a total monthly cost base of €200K. Now cast you mind forward to when you’ve scaled the company and your total cost base is €200K a month. Just how low would you be willing to let your cash balance go or are you willing to run it all the way to zero and risk bankruptcy? 1 month? 2 months? 3 months?
If it’s 3 months then you only have €1.4M to invest in your company not the €2M that you actually raised. The remaining €600K is going hopefully sit in your bank account to protect you from the possibility of not making payroll. You can’t spend all the money you raised.
There are loads of reasons why you need to raise more than you think but working capital requirements is one of the easiest to quantify and inexcusable to ignore.