Every company struggles with the issues of resource allocation. The three most important resources are money, time, and people.
Whether your firm is a growing concern or a distressed company, these resources are critical.
Capital: Most improvements and initiatives require capital. The question is how much, and what will the return on that capital investment be. All too often, one can become quite myopic with a certain solution that requires a large capital demand. Often, there are less expensive ways to achieve the outcome that is desired. A glaring example is Genentech.
When Genentech needed resources to commercialize their company, they asked for three and a half million dollars. The venture capital firm, Kleiner Perkins, was eager to invest in Genentech. Tom Perkins, co-founder of the firm, asked why they were asking for that much capital. The answer was that they needed laboratories, equipment, employees, etc. Kleiner thought about it for a while, and he came back to Genentech with a different idea. He suggested that the work be outsourced to two different places, which already had the labs, equipment, and employees. This suggestion took the need from three and a half million dollars to two hundred and fifty thousand dollars. Instead of making a large capital expenditure, Genentech used other existing resources to achieve their initial goals.
However, most entrepreneurs and business owners ask for too little. Why? An assumption that it is a smaller amount is easier sell to investors. Not so. Sophisticated investors are do not want to be caught in a “lame duck” round of financing. A lame duck round is when an amount being raised is not quite enough to provide some cushion for contingencies. When “things happen”, and they do (even good things like faster growth than anticipated), one has to go back to the investors and raise more capital. Raising capital is expensive. It takes precious time away from running the business, and furthermore, unintended raises create the dilution that may not be accretive.
So, when you budget for a raise, make sure you add “contingency capital” for the unforeseen, or at the very least, the money you really need to achieve your needs and goals. Since you will have to sell the amount and “defend” the amount anyway, you don’t want to create the concern with a prospective investor that you are not going to reach your next goal with the amount you are requesting.
Too little capital translates into the inability to hire the right people, nor the right amount of people. Not enough capital will cause a waste of time. Before raising money, go through the exercise of financial modeling many times in order to get to the right amount you need.