Capital Raised to Date? How Investors Should Ask and Entrepreneurs Should Answer This Question

The amount of money a company raises to finance its operation is an important metric, but I’ve learned that entrepreneurs and investors often calculate this differently. We recently sent out our quarterly survey to the 25 investments we’ve made through the MergeLane accelerator and fund for startups with at least one woman in leadership. Case in point, 10 of our 25 portfolio companies calculated the Capital Raised to Date metric differently than I would have. This got me thinking: What should really be included in this metric?

“Capital Raised to Date” is not a standard accounting term and, to my knowledge, there is no standard definition or official guideline for calculating this metric. However, it is one of the most commonly reported metrics in the startup community, so I thought it might be helpful to try to outline a standard. After putting some thought into this, speaking with other experienced investors, and consulting our CPA firm Anton Collins Mitchell, I’ve developed the following guide for calculating this metric. Please comment if you have feedback.

What might be included in “Capital Raised to Date”?

The following is a comprehensive list of things that entrepreneurs and investors couldconceivably argue should be classified as Capital Raised to Date:

1. Any money invested by outside investors in exchange for equity or convertible debt
2. Money invested by founders in exchange for equity or convertible debt
3. Personal credit card debt and expenses paid by the founders intended for reimbursement or already reimbursed by the company
4. Institutional debt financed by the founders (e.g., home equity lines of credit, loans secured by the founders’ personal assets)
5. Debt secured by company assets or financed by nonfounders (e.g., bank loans to the company or debt financed by outside individuals)
6. Short-term debt to finance inventory (e.g., factoring)
7. Money raised through awards or grants
8. Any financial contributions for which the contributor received nothing in return (e.g., a Kickstarter backer)
9. Any financial contributions for which the contributor received something in return after deducting the cost of the item received (e.g., if a Kickstarter backer contributes $200 for a t-shirt and it costs $25 to produce and deliver that t-shirt, $175 could be included in the Capital Required to Date figure)
10. The fair market value of in-kind donations necessary for business operations (e.g., donated office space)
11. The fair market value of any sweat equity contributed

What should be included in “Capital Raised to Date”?

What should be included is another question. The answer, in my opinion, depends on the intention of the metric.

I think all of the items above would be more accurately classified as “Capital Required to Date” and should only be used if the metric is being used for the following reasons:

• To really understand how much capital would be required to start a similar business
• To compare the capital requirements of a business to those of another business
• To understand how much founders and others have really invested in the business
• To understand how much capital has actually been required to date

However, from my experience, the “Capital Raised to Date” metric is not typically used for the reasons stated above but rather for two other main reasons: 1) to understand capital efficiency, and 2) to measure the progress the company has achieved. The items that should be included are different for each.

Using “Capital Raised to Date” to measure efficiency

If the intention of the metric is to understand capital efficiency, i.e., how much capital has been required to date, I think the following should be included:

1. Any money invested by outside investors in exchange for equity or convertible debt
2. Money invested by founders in exchange for equity or convertible debt
3. Outstanding personal credit card debt and expenses paid by the founders intended for reimbursement by the company totaling $20,000 or more
4. Institutional debt financed by the founders (e.g., home equity lines of credit, bank loans secured by the founders’ personal assets)
5. Debt financed by nonfounders (e.g., bank loans or debt financed by outside individuals or organizations)
6. Money raised through awards or grants as an alternative to equity and debt financing. (This one is tricky. I would only include this if the award or grant was used to finance operations when operating income was not sufficient. That is, if a company is bringing in enough revenue to finance its operations at the time in which the award or grant was received and does not need outside capital to finance its operations in the near future, I would not include grants and awards in this metric. I would, however, include this amount if the grant was intended to cover capital expenditures.)
7. Any financial contributions for which the contributor received nothing in return (e.g., a Kickstarter backer) (the logic used for the “6” option above should be applied here)
8. Any financial contributions for which the contributor received something in return after deducting the cost of the item received (e.g., if a Kickstarter backer contributes $200 for a t-shirt and it costs $25 to produce and deliver that t-shirt, $175 could be included in the Capital Required to Date figure) (the logic used for the “6” option above should be applied here)

Using “Capital Raised to Date” to measure progress

If the intention of the metric is to understand the progress the company has made, i.e., company traction, outside validation (i.e., how many people have said “yes” to the business), and the stage of the business (e.g., a company that has raised $5 million is typically later in its business lifecycle than a company that has raised $500,000), then the following should be included. (Note: This is the definition we typically use when vetting potential MergeLane investments and monitoring portfolio results. If you are using this metric for MergeLane-related purposes, e.g., our quarterly survey, please use this method.)

1. Any money invested by outside investors in exchange for equity or convertible debt
2. Money invested by founders in exchange for equity or convertible debt
3. Debt secured by company assets or financed by nonfounders (e.g., bank loans to the company or debt financed by outside individuals, including loans that were obtained by the company but required personal backing from the founders)
4. Money raised through any awards or grants (for this purpose, I would use the total amount regardless of whether the awards or grants were needed to fund operations)
5. Any donations for which the donor received nothing in return (e.g., a Kickstarter donation) (the logic used for the “4” option above should be applied here)
6. Any donations for which the donor received something in return after deducting the cost of the item received (e.g., if a Kickstarter backer contributes $200 for a t-shirt and it costs $25 to produce and deliver that t-shirt, $175 could be included in the Capital Required to Date figure) (the logic used for the “4” option above should be applied here)

Should revenue be included in “Capital Raised to Date”?

Revenue from company operations should not be included in this metric. This also applies to capital raised through rewards-based crowdfunding, e.g., Kickstarter campaigns. As I mentioned above, the cost of the reward received should be subtracted from the total raised.

 Using “Capital Raised to Date” when the intention is unclear

If there are multiple intentions or the intention is unclear, e.g., an investor asks an entrepreneur how much money they have raised to date and doesn’t reveal his or her motivation, I think it makes sense to avoid this metric all together. It is better to list the details the person asking the question will most likely want to hear.

Under this scenario, I would not mention the following simply because I find these to be atypical things to include:

1. Personal credit card debt and expenses paid by the founders intended for reimbursement or already reimbursed by the company
2. Short-term debt to finance inventory (e.g., factoring)
3. The fair market value of in-kind donations necessary for business operations (e.g., donated office space)
4. The fair market value of any sweat equity contributed

I would include the following:

1. Any money invested by outside investors in exchange for equity or convertible debt
2. Money invested by founders in exchange for equity or convertible debt
3. Debt secured by company assets or financed by nonfounders (e.g., bank loans to the company or debt financed by outside individuals)
4. Money raised through awards or grants
5. Money raised through rewards-based crowdfunding/contributions

Here is a suggested format:

Company X has raised $X dollars from investors. (Include all dollars invested through equity and convertible debt and mention the amount of founder investment if it is above $50,000. This shows founder commitment.) The company has also received $X in nondilutive funding grants and awards. (Include all dollars raised through awards and grants. It might make sense to break this into specifics if the grants or awards are impressive and well-known, e.g., an NSF grant.) We raised $X in nonequity crowdfunding. (Include all dollars raised through rewards-based crowdfunding, including dollars raised in exchange for something of value and mention the platform if it is recognizable, e.g., Kickstarter. Stating this total number provides validation for the business opportunity.) Company X obtained a [insert type of debt financing] for $X. (This last sentence should be used to disclose any major liabilities over $50,000 and/or enhance credibility by mentioning other people or individuals who have said “yes” to the business.)

Here is an example:

“Company X has raised $1,000,000 from investors, $100,000 of which was invested by our founders. The company has also received $250,000 of nondilutive funding from the National Science Foundation, won $100,000 from a national pitch competition, and raised $300,000 from a successful Kickstarter campaign. Company X has obtained a bank loan of $150,000 and a private loan from the founder of Uber for $50,000.”

Dilutive vs. Nondilutive Funding

As if “Capital Raised to Date” weren’t confusing enough, there is also this issue of dilutive vs. nondilutive funding.

Dilutive funding includes all capital raised in exchange for equity in the company, e.g., preferred stock. Nondilutive funding includes anything lent or donated to the company, e.g., debt financing or grants. Because the amount of equity previously awarded by a company is a very important detail, it is helpful for investors and entrepreneurs to break Capital Raised to Date into nondilutive vs. dilutive funding. However, the big question here is this: How is convertible debt classified? To my knowledge, there is no standard for this, but I feel very strongly that convertible debt should be classified as dilutive funding. The intention of convertible debt is to convert it into equity and, from my experience, it is seldom repaid to investors as debt.

There you have it. Capital Raised to Date is clear as mud. What do you think?