13. The "Two And A Half" Rule Of Project Funding - Business Bits - 30 Days Challenge
How much money do you need for making this real?
That’s arguably the first question you hear from a VC, once you convinced him you’re a genius and your next startup idea will burn Facebook, Uber, Airbnb and Google, all at the same time.
That’s also the most important question you need to ask to yourself before even thinking to ask for funding from anybody.
A Personal Example
My first successful exit was an online publishing company. It started before Google even existed and it got sold just before the Lehman Brothers moment. During its lifespan we designed, coded, launched, maintained and promoted 25 different portals.
We specialized in launching vertical online portals, building one of the most popular (if not the most popular, at that time) cars portal in Romania and also the most popular culinary recipes community.
To be honest, those were the only two sites considered when I started the discussion with potential buyers. I was very surprised, in the beginning, because, although the remaining 23 were in more or less dormant state, I was firmly believing there is some value in them as well.
But it wasn’t. Investors are not interested in failed or dormant projects. They’re interested in stuff that works. Period.
So, after I managed the exit, I started to look back at all the other projects that didn’t take off. I knew for each of them the exact amount of money and human power allocated, only I never sit down to calculate an average, because I was so caught in the day to day operations with the rest of the business.
After I looked at all, something very interesting happened: I spotted a trend. A specific, recurring blueprint in implementing all those projects.
The fist stage was a very exact calculation of the budget we needed. Hardware, running costs, human power, salaries, even rent (if we needed more space for people,) etc. Then we were starting to implement, for 3 to 6 months.
After the launch, each and every time, we realized that we were underfunded. I called this “the second funding stage”. We had to put more money in, just to keep the things afloat. At this stage, just after the launch, pretty much every project needed as much as another complete initial round. There were a few exceptions, but, generally speaking, that was the trend.
After a few months of operations, we were entering the third stage, in which we also realized that we need more money, but this time only half of the initial budget. So, all the projects, including the 2 most successful ones, followed the same pattern: the actual budget was always two and a half bigger than what we initially thought.
If we thought we need 10.000 USD, in the end we had to spend 25.000.
After I looked around, at other people doing the same thing in my niche, I saw that it wasn’t something specific to us (in other words, it was not specific to our modus operandi). Everybody had the same issues. Everybody had to pay more than the initial budget.
I don’t know if this is related to the speed of the technology, to devaluation of the online assets or to a generalized, chronic inability to correctly evaluate the budget for an online project. Fact is, this magic number seemed to work like a charm (pun intended).
So, I’m passing this lesson learned to you. Take it as a suggestion, not as an absolute number, but if you want to start a new online business (being it just functioning as a curator for Steemit, for instance) please have in mind this funding model.
Whatever you think you need (in terms of money or time) multiply it by two and a half, and you will get a decent estimation.
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This post is part of a 30 days challenge on business, you can find the entire list of articles here.
I'm a serial entrepreneur, blogger and ultrarunner. You can find me mainly on my blog at Dragos Roua where I write about productivity, business, relationships and running.
