How much to raise, or not to raise? That is the question!

One of the foundational questions for any climate startup is how much money you’ll need to raise to hit your next milestone, profitability, etc. So when it’s time to start fundraising, how can you build an accurate picture of your financing needs? What options are out there beyond venture capital? And what happens if you can’t raise the amount you’d hoped for?  

Kat Hunt is Managing Director at Earth Finance and has served as a Fractional CFO for a number of climatetech startups. We sat down with her to discuss how founders should plan their raise, integrate non-dilutive funding, and build a back-up plan in case a raise falls short of expectations.

How much money do you need? 

The amount you’re raising needs to last you 12-24 months, and allow you to hit the commercial objectives investors will want to see before they will finance another round. 

To calculate your number accurately, you need to start from these goals/targets and work backwards. In some cases, your next raise will depend on hitting a certain ARR or MRR target if you’re a software startup, or getting to a specific technology readiness level if you’re a hardware business. Think about your longer-term goals first - what you want to have accomplished at 24 months - then set out the milestones you’ll aim to pass on the way.

Then, start to identify all of the cost-intensive factors that’ll go into hitting these targets, from hiring to equipment. Add in some buffers to avoid running the risk of underestimating. Your proforma will play a valuable role here, allowing you to run different scenarios - like what happens if you’re completely off base about the costs and timelines involved - and get instant insights into how that will affect your business. Also, don’t forget to budget in the time needed to begin your next fundraise - time is money so this should also be part of your financial budget.

What funding is within reach?

Once you’ve totaled up these costs and have a number in mind, you’ll need to compare it with the reality of the funding that’s actually available to you. Don’t make the mistake of funding everything with equity and overlooking non-dilutive sources of capital. But you should also take care not to go too far the other way, and try to raise as little equity as possible without properly asking whether you’re likely to succeed at financing your business solely with grants and debt. Even if you do, it can take a long time for the cash to actually hit your bank account, and the small amount of equity you’ve raised may not be enough to sustain you while you wait or cover the down payment/collateral needed to secure non-dilutive debt.

Focus on the grants you can win

Your chief responsibility is keeping your business afloat, so you can’t waste time on opportunities you don’t have good odds of winning. That means you need to take time to interrogate which grants your business is eligible for. Start by talking to people - peers, founders, investors - who’ve been through the grant process, checking out our Insight series and the website OpenGrants. It’s also great to contact the issuing administrator’s office directly to get direct advice on the program you’re considering. If you’re serious about starting an application, consider hiring a partner like Earth Finance or Climate Finance Solutions.

Do your financing in the right order

Some funding sources will be dependent on you having other cash in place first. For instance, you might be a heat pump startup in need of manufacturing equipment, and plan on leasing it with the help of an equipment financing provider. In that case, you’ll likely need to raise some equity first so you can approach lenders with a decent runway - if you're running out of cash, you’ll have a hard time convincing them of your ability to repay the debt over the course of the loan/lease.

Is your number nonsensical? 

Once you’ve done your homework about the funding you can get, and potentially had preliminary conversations with lenders/equity investors, you should have a clear number in mind for your raise. Your next step is to take it to fellow founders, friendly investors, and advisors, and ask whether this amount makes sense given the market you’re building in, your stage, and your metrics. But make sure the people you’re asking have a keen understanding of how the market currently works, and avoid generic feedback that’s not reflective of your particular company. 

It’s also worth taking a look at the rounds that other companies in your industry are raising, which is a useful data point to present to investors.

When you can’t raise the full amount

Just because you’ve built your plan around a specific number doesn’t mean you’ll secure it. And even if you only raise half of what you wanted, it may need to last just as long, as going back out to market in 3-6 months again can be extremely difficult.

You’ll need to think about how you can operate more leanly while still hitting your milestones, so go back to your model and challenge your assumptions. It might mean you don’t hire as many people, do the pilots that you wanted to, or target a customer segment you were planning to target. 

But having a smaller amount of money to work with doesn’t always have to mean cutting your operations, and ideally it won’t mean generating only half the traction. You can use this disappointment as a catalyst to making strategic moves you might not have previously considered, like working alongside a partner to achieve some of your goals. A lot of incredible innovations have come from having limited resources, so bring your team together and try to think creatively about how you can move forward within these restrictions. In some ways, it’s actually easier to raise less, and people will be impressed if you accomplish a lot on a smaller amount.

Getting the investor dynamics right 

Most founders are aiming for between 10% and 30% dilution in a given round. You’ll generally have one lead investor who’ll take anywhere from 25% to 60% on a round, and other investors will take the rest. The lead will often have ownership requirements - typically they want to own around 10% of your company. So, if you're raising $8 million on an $80 million valuation, and you want the lead to take half, they might not be able to hit their ownership target. They’ll also often have portfolio construction requirements around the multiple on invested capital. These are dynamics you’ll need to play with as you’re navigating the fundraising process.

Remember: you’re always fundraising

How much money you need isn’t a question that you should ask every two years, but every day. You need to be constantly checking your cash flow to understand your working capital restraints and when you’re going to run out of money. If you’re not hitting the right commercial milestones, you might not be able to raise additional equity, so whether you cut burn or take on debt, you’ll need to have a plan of action for bridging that gap. Continually considering alternative scenarios at particular forks in the road and the ability to be nimble is key to a successful fundraising plan.

Kat Hunt is a managing director at Earth Finance. She currently leads the of Transition Finance and Innovation practice, providing climate finance services to corporates and climatetech and building out capital solutions. Previously, Kat ran a climatetech finance and operations advisory practice and was a founding member of PwC's ESG and sustainability practice, advising clients on climate data and expected ESG reporting requirements. She’s also built and scaled key operational departments: Dropbox’s revenue generation team and Beautycounter’s EHS/product development department.