If you’re looking for venture capital of angel investor funding, you have some work to do before making some calls and the first job is to find a factual valuation for your startup. We’re used to going to the mall or other store and seeing a price tag and assuming that the valuation for the item is correct and appropriate. As consumers we don’t have to think too much about the value of something because the price tag has already announced it to us but a business is different.
Your new business is even more difficult to value because much of it is based on what you could do in the future and that’s partly a matter of opinion.
What is your new startup worth and why is that important? Because you can’t receive any venture capital funding without a clear, factual valuation. Once you figure out your value, what should you keep in mind when figuring out your funding needs?
What are you Buying?
A venture capitalist isn’t going to entertain your request without knowing what the money will buy. If you are planning to purchase office furniture for your new offices in a luxury business complex, think again. If you’re using it to pay yours and your partner’s executive salary, don’t expect to get much funding.
You should take very little compensation and sit on a folding chair at the beginning so your funding can go towards directly growing the business. Make a list and know how funding each line item requires. Finally, be prepared to defend each of your lines and have a plan B if you’re asked to cut the number down.
How Much Can you Get?
With the help of financial professionals, you find out that your startup has a worth of $1 Million. No investor will give you a loan for the full value of your company and certainly not more than your worth. In fact, plan on about 25% so don’t plan on receiving more than $250,000 in funding.
What Kind of Investor?
Now that you know that you may only be eligible for $250,000 in funding, you probably aren’t eligible for funding from a venture capitalist. VC firms don’t want to invest the man-hours in to investigating your company unless the investment equals $2 Million or more. Your funding requirements make you the ideal candidate for an angel investor.
What Will You Offer?
If you’re going to ask for 25% of your company’s value in funding, be prepared to give up 25% of your company. If you want a loan that you can pay back with interest, go to a bank. An investor is looking to make much more than 5% from their investment in to your company. They see promise in your startup and they want in on the action. If you aren’t willing to give up a piece of your company, don’t seek funding from an angel investor.
The easiest answer to the question of how much funding you need can be summed up very simply: Ask for the minimum amount needed but make sure it’s enough to get the job done.