matt-robinson-ceo-nested-head-shot

Finance Workshop

How much money a startup needs to raise – and how to spend it

Exactly how much money do you need to raise and how do you spend it without crashing? Matt Robinson is on his second company, Nested, and reckons he’s hit on a formula.

18 Nov 2016

In some ways, GoCardless and Nested are quite similar. Both of the businesses Matt Robinson founded operate as digital middlemen; the former is a means for companies to take payments and direct debits easily and inexpensively, while Nested attempts to speed up the process of selling a house.

But they differ in one rather crucial way. While GoCardless grew from scratch with very little in the bank, Matt Robinson’s new ‘proptech’ business requires seed funding of a vastly different order of magnitude to even get off the ground.

Property chain

Robinson now finds himself in a high-stakes business, effectively stumping up the money for a house seller, guaranteeing a minimum value, and quickly handing over the cash to avoid the common scenario in which a deal falls through because cash is locked out in a property chain. ‘I couldn’t have started this business as a first time entrepreneur,’ says Robinson.

Ramen profitable

His first venture, GoCardless, has raised a total of £20m since launching in 2011 and went through the legendary YCombinator incubator programme in California. He says GoCardless operated on what YCombinator co-founder Paul Graham termed ‘Ramen Profitable’; the state where the founding team subsists on nothing but noodles until the business needs scaling.

Robinson says, like many startups, he took a stab in the dark at how much investment he needed for GoCardless. ‘Once you’ve gone through the process of raising investment, it’s incredibly easy to work out, but first time round it’s very hard. We had no idea,’ he says.

Raising for Nested

He has established a set of principles based on his experience with GoCardless which he reckons can be applied to most startups looking to estimate their projected ‘burn rate’ (see below).

Funding houses puts a different demand on Nested’s capital needs. The £3m it raised since launching in 2015 can fund no more than five properties at £600,000 each; a modest milestone that Robinson has set to prove that the Nested model works.

‘Very soon we’ll need £10m to get some momentum and not long after even as much £100m.’ At that point, he predicts he is likely to opt instead for debt funding, meaning he will have to become familiar with the nuances of an entirely new means of raising cash.

Matt Robinson’s five principles

1. ‘It takes six months to raise investment, and it’s likely you will need to raise again in 12 months’ time. A startup is therefore looking for an 18- month runway.

2. Staff typically make up between 60% to 70% of costs. I assume four or five people in the very early days and calculate their combined salaries for 18 months as the basis of working out how much we need to raise.

3. Paul Graham from YCombinator asks, “are you default dead, or default alive?” No path to profitability is the worst thing to tell investors.

4. Slowing down growth is the second worst thing for investors. You must show momentum.

5. Have a clear reason to raise, e.g. competition and the need to grow fast.’

 

This story is taken from Courier Dec 2016/Jan 2017.