đ§ Dojo Compass
Module: Finance, Risk Management and Long-Term Resilience
Focus Area: Capital Raising
Key Article Point
Every capital raise begins with a seemingly simple question:
How much money are we seeking?
Yet this question is often given surprisingly little analytical attention.
Entrepreneurs may spend weeks or months refining their Information Memorandum, improving their pitch deck, building financial models, preparing market analyses, and identifying potential investors. But the amount of capital being requestedâand, more importantly, exactly what that capital is intended to accomplishâmay remain based on a relatively simple calculation.
How much do we think we need?
How much do we think investors might be willing to invest?
How much can we raise without giving away too much equity?
These are important questions. But they do not provide a sufficiently complete framework.
The amount of capital a company raises can materially influence the path of the business.
Raise too little, and the company may fail to achieve the milestones necessary to create meaningful value before it runs out of capital. The management team may be forced back into fundraising before the business has generated sufficient progress to justify a higher valuation.
Raise too much, and the company may unnecessarily dilute its founders and existing shareholders. Even worse, excess capital may encourage inefficient spending or be allocated toward initiatives that do not create sufficient value.
The objective, therefore, is not to raise as much money as possible.
Nor is it to raise the smallest amount that will allow the company to survive.
The objective is to raise:
The right amount of capital, at the right time, from the right sources, to achieve clearly defined value-creating objectives.
This requires the entrepreneur to treat the Use of Funds as a strategic framework rather than a simple table at the end of a pitch deck.
đŻ Key Challenge
How can a company determine the amount of capital it should raise without either underfunding its growth or creating unnecessary dilution and inefficient capital allocation?
Two common errors sit at opposite ends of the capital-raising spectrum.
The first is underfunding.
Many entrepreneurs believe that asking for less money will automatically make a capital raise easier.
This assumption is not necessarily correct.
Investors often have preferred investment ranges and portfolio strategies. A smaller request is not automatically more attractive simply because it is smaller.
More importantly, investors are generally interested in whether the capital can help create meaningful value.
If a company requires $10 million to achieve a critical commercial milestone but raises only $4 million, the lower funding amount may actually increase the company’s risk.
The business may make partial progress without reaching the point at which the market, customers, or future investors assign it significantly greater value.
The company then faces a second fundraising processâpossibly from a weaker negotiating position.
For SMEs and entrepreneurial companies, this problem can be particularly significant.
Fundraising requires substantial management attention. Senior executives may spend months preparing materials, meeting investors, responding to due diligence requests, negotiating terms, and completing the transaction.
During this period, the business itself must continue operating.
A company that raises too little may therefore create an expensive cycle:
Fundraise â Partial Progress â Run Low on Capital â Fundraise Again
The second error is overfunding.
Capital is not free.
Equity financing generally requires the company to exchange a portion of future value for capital today.
If the company raises significantly more capital than it can deploy intelligently over a visible planning horizon, the founders may experience unnecessary dilution.
The consequences can be substantial.
Imagine two companies that each require $10 million to achieve the same critical milestone.
One raises $20 million because it believes that more capital is always better.
If the additional $10 million does not create proportionate value, the company may have given away a meaningful amount of future ownership without receiving a corresponding strategic benefit.
The challenge is therefore to avoid both extremes.
The entrepreneur needs a framework that asks not simply:
How much money do we need?
But:
What are we trying to accomplish with capital, how much will each objective require, when will the money be needed, and what is the most efficient source of that capital?
đĽ Dojo Solution
The Dojo approach is to build a Capital Use of Funds Matrix around six questions:
1. Purpose
What are we raising the money to accomplish?
2. Specificity
What initiatives, resources, or capabilities will the capital fund?
3. Range
What is the realistic funding range once uncertainty is considered?
4. Timing
When will the capital actually be required?
5. Milestones
What measurable value-creating milestones should the capital help the company reach?
6. Source
What is the most appropriate source of capital for each funding requirement?
Together, these questions transform the Use of Funds from a list of expenses into a strategic map connecting:
Capital â Action â Milestone â Value Creation
This connection is critical.
Investors do not generally invest in expenses.
They invest in the expectation that capital deployed today can contribute to the creation of greater value tomorrow.
The entrepreneur should therefore be able to explain not only where the money will go, but what the company expects to become capable of achieving because the money was invested.
đď¸ Putting It into Practice
Step 1. Define the Purpose of the Capital
The first question is whether the company is raising capital for a specific initiative, broader corporate growth, or a combination of both.
Specific Initiative Capital
Examples include:
- Developing a new product
- Building a manufacturing facility
- Entering a new market
- Acquiring another company
- Completing a technology platform
- Financing a major expansion
In these situations, the use of funds can often be defined with relatively high specificity.
Growth Capital
In other situations, the company may be raising capital to support broader growth.
This does not mean the use of funds should simply be described as:
âGeneral corporate purposes.â
The company should still identify the categories of activity it expects to fund.
For example:
- Building the commercial team
- Expanding product development
- Increasing production capacity
- Entering selected markets
- Strengthening technology infrastructure
- Providing working capital for growth
The more uncertain the precise allocation, the more important it becomes to explain the decision framework that will govern how capital is deployed.
The investor may not need to know the exact date on which every dollar will be spent.
But they should understand the strategic logic behind the allocation.
Step 2. Define the Use of Funds with Maximum Practical Clarity
Broad categories are often insufficient.
Consider the difference between:
$2 million for hiring
and:
$2 million to hire a Chief Commercial Officer, three regional sales leaders, six sales representatives, two product specialists, and supporting operational personnel required to enter three targeted markets.
The second description does more than provide additional detail.
It creates a connection between the capital, the operational plan, and the intended business outcome.
The same principle applies to international expansion.
Instead of:
$3 million for international expansion
define:
- Which markets will be entered?
- Why were these markets selected?
- What is the entry strategy?
- What resources will be required?
- What will market entry cost?
- What milestones will determine whether the strategy is succeeding?
This does not mean pretending that the future can be forecast with false precision.
It means demonstrating that the company has thought through the deployment of capital.
A useful framework is:
| Use of Funds | Specific Initiative | Expected Cost | Timing | Value-Creating Milestone |
|---|---|---|---|---|
| Commercial growth | Build sales team | Range | Months 1â12 | Revenue growth |
| Product development | Launch new product | Range | Months 1â18 | Product commercialization |
| Market expansion | Enter selected market | Range | Months 6â24 | New market revenue |
| Technology | Upgrade platform | Range | Months 1â12 | Greater scalability |
| Working capital | Support growth | Range | Ongoing | Operational continuity |
The objective is to ensure that every major allocation can answer:
What are we spending this money on, and what are we trying to achieve by spending it?
Step 3. Use Ranges Rather Than False Precision
Entrepreneurs frequently feel pressure to make the Use of Funds appear highly precise.
But precision and accuracy are not the same thing.
A forecast that states a new market entry will cost exactly $1,437,280 may appear sophisticated. If the underlying assumptions are weak, however, the additional precision creates little real value.
A well-developed range may be more useful.
For example:
Expected cost: $1.2 millionâ$1.6 million.
The range should not be arbitrary.
It should be based on identifiable assumptions and potential variations.
Sensitivity analysis can then be applied to key variables.
Ask:
- What happens if hiring costs are 20% higher?
- What happens if market entry takes six months longer?
- What happens if customer acquisition requires more capital?
- What happens if revenues are delayed?
- What happens if a key supplier increases prices?
This process can create three useful capital scenarios:
Base Case
The amount required if the business develops broadly as expected.
Pressure Case
The amount required if important assumptions are delayed or costs increase.
Opportunity Case
Additional capital that could be productively deployed if growth opportunities emerge faster than expected.
This creates a more dynamic view of capital requirements.
Step 4. Determine the Timing of Capital Requirements
Having sufficient capital in total is not enough.
The company must have capital available when it is needed.
Some initiatives are highly time-sensitive.
A market opportunity may disappear.
A competitor may move first.
A key acquisition target may no longer be available.
A product launch may be delayed if resources arrive too late.
The entrepreneur should therefore build a Capital Timing Map.
For each major initiative, determine:
- When does spending begin?
- When does the largest capital requirement occur?
- When is the initiative expected to generate results?
- What happens if the expected results are delayed?
- How much financial runway remains?
This can be represented conceptually as:
Capital Raised â Capital Deployed â Milestone Achieved â Value Increased â Next Financing Point
The goal is to avoid reaching the next financing round simply because the previous money has been spent.
Ideally, the company reaches the next capital event after achieving milestones that improve its bargaining position and valuation.
Step 5. Define the Value-Creation Milestones
One of the most important questions in capital planning is:
What should be true about the company after this capital has been deployed that is not true today?
The answer should go beyond:
âWe will have spent the money.â
Possible milestones may include:
- Revenue reaching a defined range
- A product being commercialized
- Entry into a new market
- Achievement of positive unit economics
- Development of a proprietary technology
- Expansion of production capacity
- Acquisition of a strategic asset
- Achievement of profitability or positive cash flow
These milestones help connect the capital raise to the future valuation story.
For example:
We are raising capital to enter two new markets.
This is an activity.
A stronger formulation is:
We are raising capital to establish commercial operations in two selected markets and achieve sufficient revenue and customer validation to demonstrate the scalability of the business model.
The capital is not simply financing activity.
It is financing a transition from one state of the company to another.
Step 6. Consider the Full Capital Stack
A need for capital does not necessarily mean that every dollar should come from the same investor or even from external equity.
The entrepreneur should consider the available capital stack.
Possible sources include:
Founder Capital
Advantages may include flexibility and avoiding external dilution.
Disadvantages include personal financial risk and limited capacity.
Operating Cash Flow
Using internally generated capital can be highly efficient.
However, excessive reinvestment may weaken liquidity or prevent the business from managing unexpected events.
Equity Investors
Equity can support initiatives involving substantial uncertainty and long-term value creation.
The cost is dilution and the introduction of additional shareholders.
Debt and Other Financing
Certain assets, working capital requirements, or predictable cash flows may be financed through debt or other forms of structured financing.
The advantage may be reduced dilution.
The disadvantage may include repayment obligations, financial risk, and reduced flexibility.
Strategic Capital
A strategic partner may provide capital together with market access, technology, distribution, or other capabilities.
But strategic capital may also create restrictions or interests that must be carefully managed.
The objective is not to find a single perfect source.
It is to ask:
What type of capital is most appropriate for this particular use?
Using equity to finance an asset that could efficiently be financed through another source may create unnecessary dilution.
Conversely, financing a highly uncertain, long-term product development program with excessive debt may create unnecessary financial pressure.
The capital source should match the nature of the capital requirement.
Step 7. Build a Capital Allocation Stress Test
Before finalizing the fundraising target, test the proposed use of funds against several questions.
The Sufficiency Test
Will this amount provide enough capital to achieve the critical milestones?
The Efficiency Test
Can every major allocation reasonably be expected to contribute to value creation?
The Timing Test
Will the capital be available when the initiatives require it?
The Delay Test
What happens if important milestones take longer than expected?
The Dilution Test
Are we raising more equity than we can productively deploy?
The Alternative Capital Test
Could part of this requirement be financed more efficiently through another source?
A proposed capital raise that performs well across these tests is likely to be more robust than one based simply on the amount management feels comfortable requesting.
đ Key Takeaways
- The amount of capital requested should be subject to the same analytical discipline as the rest of the fundraising process.
- Raising too little can prevent the company from reaching critical value-creation milestones and force a premature return to the fundraising market.
- Raising too much can create unnecessary founder dilution and encourage inefficient capital deployment.
- The Use of Funds should connect capital to specific actions, milestones, and expected value creation.
- Broad categories such as âhiringâ or âinternational expansionâ should be translated into concrete initiatives wherever practical.
- Well-supported funding ranges are often more useful than false precision.
- Sensitivity analysis should test how capital requirements change when assumptions prove inaccurate.
- Capital planning should consider not only how much money is needed but when it will be needed.
- Each major use of capital should ideally contribute to a defined transition in the company’s development.
- Different funding requirements may be better served by different forms of capital.
- The goal is not to raise the maximum amount of money. It is to raise sufficient capital to reach the next value-creating stage of the company’s journey while minimizing unnecessary financial cost and dilution.
đż Reflection
Capital raising is often described as a search for money.
But money is only the visible part of the process.
The more important question is what the company intends to become because of the capital it receives.
Capital can accelerate growth.
It can also accelerate mistakes.
A company that has not thought carefully about how it will deploy capital may discover that access to additional money does not automatically produce additional value.
In some cases, limited capital can even create useful discipline.
It forces the company to prioritize.
To distinguish between what is interesting and what is necessary.
To identify the activities that genuinely create value.
The solution, however, is not to remain permanently undercapitalized.
Businesses need sufficient resources to pursue opportunities, withstand uncertainty, and build the capabilities required for growth.
The challenge is to find the balance.
The entrepreneur should therefore think of a capital raise not as a request for a pool of money, but as the financing of a journey between two points.
The company exists today in one state.
The capital is intended to help it reach another.
The entrepreneur’s responsibility is to explain that journey clearly:
Where are we today?
Where are we trying to go?
What resources are required to get there?
What milestones will demonstrate that we have arrived?
And why is this the right amount of capital to make that transition possible?
When these questions are answered clearly, the Use of Funds becomes more than a financial schedule.
It becomes part of the company’s strategic story.
âď¸ Dojo Mission
Before beginning your next capital raiseâor revising an existing fundraising planâbuild a Capital Use of Funds Matrix.
For every major use of capital, identify:
- The initiative: What specifically will the money fund?
- The strategic purpose: Why is this initiative important?
- The cost range: What is the expected minimum, base, and pressure-case requirement?
- The timing: When will the funds actually be required?
- The milestone: What should the company achieve as a result?
- The value connection: How could this milestone increase the value of the business?
- The funding source: Is equity the most appropriate source of capital?
Then conduct two final tests.
First, ask:
If we raise only 75% of the target amount, what critical objectives would we fail to achieve?
Second, ask:
If we raise 125% of the target amount, can we clearly explain how the additional capital would create proportionate value?
If neither question has a clear answer, the fundraising target may not yet be sufficiently developed.
The strongest capital raise is not built around the largest number that an investor may be willing to fund.
It is built around a clear understanding of the amount of capital required to move the business toward its nextâand more valuableâstage.
Raise capital with a destination in mind. Every dollar should have a purpose, every major initiative should have a milestone, and every milestone should move the business closer to a stronger future.
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