One of the biggest questions from startups is, “How much money should I ask investors for?”
What they should really be asking is, “What is my company’s valuation?” You must know how much your company is worth before asking for any amount of money. And when you do, you want to make sure it is the minimum amount you need to make your idea work. It is not a good idea to under or overestimate thinking you can either get your foot in the door or negotiate down with an investor. It can ruin your credibility and chances of getting funding before investors even look at your business plan.
Making Your Case To Investors
Now that you have a general idea of how much your company is worth, here are some things to think about and how you use that information to justify your request to investors.
- Consider implied ownership cost. Don’t ask for an investment that is more than your business’ valuation. If your valuation is $1M, you can ask for $200-300K and offer 20-30% of equity in exchange.
- The type of investor you chose is important to how much capital you can ask for. Angel groups will not consider an offer over $1M.
- What stage is your company in? If you are in the early stages, but have a prototype, angels might be interested. Keep in mind if your company is still in the “idea” stage, it has no valuation and investors other than your friends and family will not be interested.
- See where your cash flow bottoms out, and add a buffer. To be credible, your request size must tie into your calculated financials.
- What are the investment terms? The most common is an equity investment. You need to figure out what works best with the valuation of your business and choose terms that will keep the investment amount credible.
- Single or staged delivery. You can request to schedule a single investment in tranches, based on milestone achievements. This can allow a larger commitment and lowers investor risk.
- How are you using your funds? Investors expect uses to apply to your core mission and want to see a “use of funds” list.
- Estimate a return on investment. To help your credibility, project a return on investment at the time of exit.
It is difficult to determine the appropriate size of investment, but it is important to get it right the first time in order to keep hold of your credibility.
Want To Learn More?
Download our free Raising Capital from Angel Investors eBook.
This guide will walk you through the process of obtaining seed capital for your startup. This book includes:
- An overview of the angel investor process and who they are
- The milestones angel investors look for when evaluating your business
- Strategies for finding the angels best fit for your startup
- How to nurture the relationship, prepare for the meeting and deliver the pitch
- Rounding out the details and preparing for the future