Most early-stage startups in Malaysia not aware of funding amount needed
Around 90% of early-stage(!) startups I meet request more startup funding than they need. Sometimes, founders are looking to raise a multiple of what the startup requires at that point. This can lead to entrepreneurs giving away more equity than they would have to, or entrepreneurs having difficulties raising the large funds requested.
Large amount raised @ a low valuation: Founders give away too much equity Some entrepreneurs give up a lot of equity early on to get their funding. By reducing the funding amount, founders can save their equity for later rounds when the traction is better and the valuation of the startup is higher.
Large amount raised @ a high valuation: Difficult to raise startup funding Typically early-stage startups that plan to raise large amounts at high valuations find it very hard to raise funds and take too long to do so. If a startup is still testing the market and growth, or without good traction to back the high valuations, many investors won't consider funding such startups. (Exceptions could be founders with a one-in-a-thousand background or their personal investor network.) If a smaller amount at a lower valuation is raised first, fundraising would happen much faster and founders can quickly go back to building their business.
What’s a good startup funding amount to raise during the early stage?
There’s no one-fits-all funding strategy, but a few things any entrepreneur should look into:
Raise enough to achieve KPIs. Plan what (revenue) traction you want to get with the help of the raised funds. Either you have to hit a breakeven point, or you have to hit attractive KPIs for your next round of fundraising. Raise enough to achieve those KPIs - not more, not less.
Consider investments in tranches. For startups in idea-stage, I’ve seen it working well to raise funds in small tranches. Entrepreneurs in idea stage would raise just enough for a few months, to develop the MVP and validate the market. They plan to get some good initial traction and to raise more money at a better valuation after this short time. Often, initial investors are willing to do follow-on funding, if the validation could be done successfully.
Only plan to spend on what is really needed. Mostly, it is best to focus on validating the business model by getting good traction in the market. The traction is more valuable than for example fully automating parts of the tech or moving into a bigger office (those expenses can come in at a later stage). Also, don't include high buffer funds in your planning.
Consider local context. Funding amounts competitors overseas raise are not a good reference point for your own fundraising strategy. Malaysian startups enjoy a cost advantage if they operate in the local market, and are able to test and go to market at a lower cost. You will most likely need a lot less than for example US or European competitors.
Plan right. Work out what (revenue) traction you want to achieve, and what expenses you have to incur for that. Put all of it into a simple monthly cash flow file, planned out until the next round of fundraising (Cash flow planning template). From there, you will be able to easily see how much additional money you need to fundraise, to achieve your projections.
Can you do it with less? Have a critical look at your required startup funding amount and your projections! Ask yourself: If you were to only get half of it, what will you spend it on? Could you still achieve your projections? If you are leaning towards a ‘yes’ or ‘maybe’, you are looking for too much money. If half the funding means lower projections, how much lower would they be? Most of the time, smaller amounts have a much higher ROI (comparing funding amount to revenues achieved).
Conclusion: Raise what you need, and not beyond that! It will make it easier to agree with investors on a valuation too, and will save you a lot of valuable time & equity!
If you are looking for advice for your startup fundraising strategy, email your pitch deck & the questions you have, and we will get back with some questions & feedback from an investor point of view.
Partner in Nexea. Nexea is an Investment Group with investees throughout Southeast Asia. We are constantly looking for startups with strong teams & interesting business models to invest in & work with.