Startups and expanding companies always need cash. They often need cash for similar reasons - some of the most common being scaling production, research and development, sales and marketing for reaching new audiences, acquiring real estate, and hiring skilled personnel.
Major shareholders and lead investors (professionals like venture capitalists and angel investors) will have a say in how a company spends their investment capital. But in a crowdfunding scenario, the vast majority of retail investors won’t. So you’ll need a firm understanding of how your funds are going to be used before you trust a company with them.
Here are a few key metrics to look at when assessing a company’s planned use of funds.
What are the company's short term and long term goals? For example, are they looking to get a new product to market? Or are they in the process of scaling the business?
Outlined goals should be measurable, divided into milestones, and directly related to the amount of funds the company is seeking. These could be things like acquiring 20 new high-profile accounts, acquiring real estate, hitting 100k subscribers, or producing x quantity of stock.
Understanding a company’s goals will help you measure up whether they’re achievable or not with the funds being requested.
‘Burn rate’ is industry-speak for how quickly a company will go through the invested capital. Every investment round will be followed with a timeline. This is usually between 12 to 18 months.
Understanding this timeline will let investors know when the next round of funding is likely to be needed. With practice, you’ll be able to recognise how realistic a company’s offer is within the time constraints they’re suggesting. Remember to factor in basic costs (e.g. staff wages, building leases) when analysing how quickly a company might burn through their funds.
A lot of investor pitches involve some pretty generic ‘use of funds’ promises. More often than not, they’ll include product development, sales and marketing, and ‘hiring key personnel’. Seeing anything other than these standard three is a good sign a company has thought creatively about how they can get the most out of your funds.