Many startup founders wonder whether they can use the funding needs of a comparable company as a guide to see how much money their company should raise. It seems like a good idea, but it is NOT!
While comparables are very important and help you determine the exit, or the terminal, value of your company, the information that they give you should NOT be used blindly.
Here are the four reasons why you need to adjust the comparables data before it becomes relevant for your company.
Reason #1: Business Model
A comparable company may have a different business model, which would result in their capital needs being slightly different from yours.
Reason #2: Cost Structure
The comparable company’s cost structure may not be similar to yours, which will also affect the capital needs.
Reason #3: Development Stage
A comparable company may be at a different stage of development and thus need more or less money than you do at your current stage.
For example, if you look at a comparable that is raising money at a series B round and you are currently at a series A round, the comparable company would need more money, even with all the other variables being equal, since they are at a later stage of development.
Reason #4: Startup Capital
The amount of startup capital that a comparable has may differ from the amount of startup capital you have.
For example, if they had a large investor that gave them an initial capital infusion, they may not need as much money at the next stage as you would if you bootstrapped instead.
Similarly, if you had more capital available to you, then your capital needs would be lower than those of the comparable company.
You cannot simply look at how much money comparable companies are raising and thereafter conclude that you would need exactly the same amount. Instead, you should build a financial model reflecting your company’s fundamentals and use it to determine your funding needs.