CHAPTER 8
Calculating Startup Capital Requirements
SUMMARY AND AUTHOR’S NOTE
One of the most difficult tasks for the startup entrepreneur is calculating how much money it’s
going to take to start the new venture. The task is complicated by the difficulty of estimating
demand for a new product or service. If a new product or service is unique (and for entrepreneurs
it typically is), the calculation becomes that much more difficult because there is no exact
precedent. Students seem to have great difficulty accepting the ambiguity of forecasting demand.
They expect you to provide a formula for accurately estimating demand, and no such formula
exists.
Typically I walk students through a scenario based on the results of their primary research with
the customer. For example, suppose the student interviewed twenty potential customers and
This chapter looks at how to estimate sales and capital expenditures for a new venture and how
to present these and other necessary figures in cash flow statements. The chapter also discusses
analyzing how much startup capital is needed to fund the venture.
CHAPTER OBJECTIVES
After reading this chapter, students will be able to:
• Demonstrate an understanding of entrepreneurial resource gathering.
Chapter 8: Calculating Startup Capital Requirements 35
CHAPTER OUTLINE
OPENING CASE: How Much Does It Really Take to Realize a Dream?
I. Identifying Startup Resource Requirements—determining the resource mix needed for
startup
• Figure 8.1—Steps in Calculating Startup Capital Requirements
a. Constructing a Business Process Map—defining operations, information flow, and
resource requirements
II. Startup Financial Metrics—metrics entrepreneurs employ at startup
• Table 8.2—Metrics for Web 2.0 Ventures
III. Develop Financial Assumptions—developing narrative assumptions for demand,
revenues, expenses, and startup costs
a. Estimate New Product/Service Demand—estimating demand for a new product or
service
i. Use Historical Analogy or Substitute Products
GLOBAL INSIGHTS—Informal Investment Is Not a Global Phenomenon Yet
i. Sales Forecast
ii. Expenses
IV. Calculating a Startup’s Cash Requirements—developing a cash flow statement
a. Assessing Risk—considering potential variables in key financial figures
• Figure 8.5—Sample Direct Cash Flow Statement for Mobile Payment
Product Company
• Table 8.4—Sample Cash Needs Table for the Mobile Payment Company
36 Chapter 8: Calculating Capital Startup Requirements
RELEVANT CASE STUDIES
Appendix: Currency13
ANSWERS TO QUESTIONS ON KEY ISSUES
1. Describe the typical metrics for a startup business.
Typical metrics include customer acquisition costs; average order size, time to reorder,
2. What are the types of resources that entrepreneurs need to gather to start a new venture?
Startup resources include 1) people, such as the founding team, advisors, and independent
3. Why is the cash flow statement the most important statement for the entrepreneur?
The cash flow statement is the most important financial statement for the entrepreneur
4. What are some ways to forecast sales effectively for a retail business? For a manufacturer?
For a service business?
You will need to estimate revenues, expenses, and startup costs from the industry, the
5. What are the three categories of funds in the cash needs assessment, and how are they used
to calculate how much money is needed to start the business?
The cash needs are separated into types of capital resources that will be required: capital
Chapter 8: Calculating Startup Capital Requirements 37
Suggestions for Experiencing Entrepreneurship
1. Interview a banker and an investor about the key financial statements that entrepreneurs
need to understand to run their businesses. Ask about the biggest mistakes business owners
make in preparing their financial models. Compare and contrast the responses of the banker
and the investor. Are their views of the financials different? Why? Prepare your responses
2. Interview an entrepreneur who has been in business no longer than five years to find out
how she or he calculated how much money was needed to start the venture. Did it turn out
to be enough? Why or why not? In a brief PowerPoint presentation, present what you