How to calculate your funding needs

As a startup, figuring out how much funding you need is one of the most critical steps you'll take. It's not just about a random number; it's about creating a realistic financial roadmap that will keep your business alive and growing. Getting this wrong can lead to serious problems, like running out of cash before you hit key milestones or giving away too much equity too early.

Understanding the core concepts: burn rate and runway

Before you can calculate your funding needs, you have to understand the language of startup finance.

The two most important terms are burn rate and runway.

• Burn rate is the speed at which your company spends its cash. It’s typically measured monthly. There are two types:

  • Gross burn rate: The total amount of money your business spends in a month, including salaries, rent, software subscriptions, etc.

  • Net burn rate: Your total monthly expenses minus any revenue you bring in. This is the more accurate number for figuring out how much cash you're actually losing each month.
    

• Runway is how long your startup can survive before it runs out of money. It's a simple calculation:

  Runway (in months) = Current Cash Balance / Net Monthly Burn Rate

  For example, if you have £100,000 in the bank and your net burn rate is £10,000 a month, your runway is 10 months. You need to plan your fundraising so you secure your next round of funding before your runway runs out.

How to calculate your funding needs

Calculating the total funding you need is more than just forecasting expenses. It's about planning your business's future and aligning it with your financial reality.

1. Start with the end in mind

Investors don't fund a company; they fund a plan to achieve specific milestones. Your funding amount should be tied to a clear set of goals you want to accomplish. These milestones could include:

• Building a Minimum Viable Product (MVP).

• Acquiring your first 1,000 paying customers.

• Achieving a specific revenue target, like £10,000 in monthly recurring revenue (MRR).

• Hiring a key team member.

2. Create a detailed business plan

This is the most crucial part. A business plan projects your company's income and expenses. It should be as detailed and realistic as possible, not just a list of optimistic guesses.

List all your costs:

Break down your costs into two categories:

• One-off startup costs: These are the initial expenses to get your business off the ground.

  • Legal fees (for incorporation, contracts, etc.)

  • Branding and website design

  • Initial software licenses

  • Prototype development

• Recurring operating expenses: These are your monthly costs to keep the lights on.

  • Salaries: Your biggest expense. Don't forget to include tax, benefits, and insurance. Be realistic about what you'll pay yourself and your team.

  • Rent and utilities: Office space, internet, and electricity.

  • Marketing and sales: Advertising, content creation, and sales tools.

  • Software and subscriptions: All the tools you need to run your business.

  • Cost of Goods Sold (COGS): If you're selling a physical product, this is the cost to produce it.

Project your revenue:

This is where many startups make mistakes. Be conservative with your revenue projections. Don't assume you'll hit a home run on day one. Use a "bottom-up" approach based on how many customers you realistically think you can acquire and at what price. For example, "We can acquire 100 new customers a month at £50 each."

Calculate your burn rate and runway:

For each month in your plan, subtract your total projected expenses from your total projected revenue to get your net burn rate. Then, you can calculate your runway month by month.

3. Determine Your Total Funding Target

Your total funding request should be enough to cover your expenses until you hit your next set of milestones, plus a substantial cushion for unexpected delays. A good rule of thumb is to aim for an 18-24 month runway. This gives you enough time to execute your plan, hit your milestones, and start the next fundraising process without a looming deadline.

Calculation:

Total funding needed = (average monthly net burn rate) x (desired runway in months) + contingency buffer

Final thoughts: Think like an Investor

When you present your funding needs to an investor, you're not just showing them a spreadsheet.

You're showing them your strategic thinking. They want to see that you've done the hard work of anticipating costs, that you have a clear plan for using their money, and that you understand exactly what milestones you'll hit to increase the company's value.