Written by Michael Ibberson on January 13, 2015. Posted in Equity Crowd Funding

Every startup may run on a different agenda, but guidelines exist to help all businesses survive their early stages. In this post, we will explore one such area—capital. Bryan Stolle, Forbes contributor, identifies two major constraints startups face procuring capital. First, businesses without substantial traction are inherently high risk, thus capital becomes more expensive. Second, balancing excess and deficiency is critical to a startup’s long-term success. To elaborate, Leo Polovets, writer at CodingVC, uses the “runway” analogy:

 “In the startup world, runway is how long your company can survive if your income and expenses stay constant…The same calculus that applies to airport runways applies to startup runways. If you raise too little money, you won’t have enough runway to do anything meaningful. If you raise too much, you’re wasting resources.”

In other words, startups that raise too little may run out of cash prematurely or lack the funds to recover from unexpected setbacks. Conversely, too much money could lead to dilution or a dangerous sense of safety. With this in mind, let’s determine how startups can build the perfect amount of runway with an equity crowdfunding campaign.

Determinants of an Equity Crowdfunding Goal

Startups should calculate two variables before crowdfunding: safeguards and milestones. Safeguards refer to financial resources used to weather unexpected market downturns, upswings or other disruptive fluctuations. Extending the runway analogy, this includes backup materials or labour for maintenance and repairs. Milestones are quantifiable achievements, explicated clearly in the business plan, that progress towards a larger end.

Capital raised through equity crowdfunding should secure several milestones, with just the right amount of safeguard for protection or innovation. Typically, 18-months’ worth of capital is sufficient, though some rounds may strive for 24 or more. Larger amounts allow startups to focus less on cash flow and more on development and growth. Alternatively, smaller seed rounds enable entrepreneurs to keep control of their companies and offer higher returns.

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