by Guest Author on December 17, 2012
What’s your company worth? As consumers, we’re used to seeing price tags. We head out to the mall, walk into a store and see that somebody has already placed a value on the items that we want. Savvy shoppers might try to haggle with a store employee but for the most part, the price is set for us.
You might be able to place value on your products or services, but valuing your business is different. If you get it wrong, the few meetings you’re able to score with potential investors may go downhill fast.
What is your new startup worth and why should you put resources into valuing it?
That’s simple, because you can’t receive any funding from investors without a clear, factual valuation.
Can You Get a Meeting?
Before deciding on venture capital or angel investors (referred to as equity financing) understand that getting an investment is exceedingly difficult for most companies and if you do get an investment, you’re likely going to give up a large piece of your company in order to do it. Many will ask for between 25% and 50% of your company to make a deal. The smaller and less proven you are, the more they will want.
Consider family and friends as your funding source. You could still offer them a stake in your company in exchange for an investment and getting a “yes” from these investors is a lot easier than angels and venture capitalists.
If you still want to pursue those funding sources, here are some tips:
Where’s Their Money Going?
When you were a child, if you asked your parents for money, what was the first question they asked?
“What are you going to buy?” Times haven’t changed all that much because investors will ask the same questions very early in the meeting.
They want to know that their money is going towards something that will grow the company. If you’re using the money to buy inventory to fill orders, that’s a good investment but if you need to pay yourself a salary, that isn’t going to result in funding.
Investors want to know that in the beginning stages you will work for essentially no money and rather than lavish office furniture and company polo shirts, you’ll sit on a folding chair if that’s what it takes. Before you go to the meeting, have a list that shows where the money will go. Be ready to defend each item and know what you’ll cut from your list if they ask. They’re not likely to get this detailed during the meeting but be ready, none the less.
How Much Can you Get?
Let’s say that you, with the help of an accountant or other business professional, figured out that your startup is worth $1 million. You don’t want to give up 100% of your company and the investor won’t want that much anyway so how much will you ask for? Maybe $250,000 for 15%? In the negotiation process, the investor will try to undervalue your company while you’ll overvalue it.
Prepare a business plan. Be ready to defend your valuation and understand that if you’re a new startup, investors don’t care what you think it will be worth in the future. Of course, you have big dreams. It’s your company, but be prepared to articulate why your business will be successful.
What Kind of Investor?
Do you need an angel investor or venture capitalist? If you only ask for $250,000, you’re likely not going to get an investment from a venture capitalist. Sure, every firm is different and some VCs will entertain small amounts of money but in general, if they’re going to invest, they want the possibility of a big payday.
It’s not worth their time to invest resources if they’re only going to make $100,000 over 5 of more years. If you need a small amount of money, look for angel investors.
Remember, you can always get a bank loan or money from family and friends. Debt financing requires you to pay the money back but it’s a lot easier to secure than equity financing. Regardless of which type of finance you secure, think about how you will use it. Being indebted to somebody else may not allow your business to grow as quickly as it could, so use the money wisely.
Years ago I needed to borrow $27,000 for a real estate venture. I was turned down by no less than a dozen banks and investors. The 13th investor made the loan, with nothing more than a one-on-one meeting. I was able to make an impassioned plea to the gentleman, filled with facts and figures.
At the end of the meeting, the man handed me an application and told me to put my name on the top and my signature on the bottom, and not worry about the rest. He then told me I would have my money the next morning. At some point most businesses will require more operating capital. The bottom line is for you to be prepared to make that request.
About the Author
Don Miller is the VP of Marketing and Consumer Advocacy at CreditCardForum.com, which is a leading card comparison and reviews site that is regularly featured in leading business publications and websites. Click here to see Don’s favorite cash back cards for 2013.