Showing all articles tagged: fund-raising



Financials... Calibration

1] Start with a "Use of Funds" list with three key figures: minimum funding to get your venture off the ground and test the waters, optimal to hit stability (self-funded, break-even?), and maximum (move fast to grab market share before others can do so). In the example below, this company optimal number is $140K. You DO need a chart that clearly explains your use of funds. Yes, you should include salaries to the key employees. And you should know how long it will take to get to stable ... the money will come from a combination of sales revenue and your start-up funds.

2] When you know your optimal start-up funding number, subtract the amount that the founders will contribute. This does NOT have to be a big number, but should show some level of commitment from the founders, albeit modest. In the case below, the founders are committing $40K, so the company needs to raise $100K from investors.

3] Early stage investors are typically looking to acquire 20 to 30% of the company. In the example below, this company is proposing selling 25% of their venture for $100K from investors. So if everything goes their way, this startup will have $140K cash committed. The $100K from the investors is 25% of the company, the company needs to be worth $400K total. Therefore, the business plan (AND the team that goes with it) must be worth $260K. Will your plan be worth $260K. YES, it CAN be ... no joke. Is it easy. No, it's not. Takes a lot of work, but you and your team CAN do it.

4] To attract investors to this venture, they want a significant return on their investment to compensate for the very high risk they are taking putting money into something that at this point does not exist. It is a startup, NOT a done deal! So they are typically looking for a return on their investment in about 5 years of 10x to 20x ... Yes, 10 to 20 TIMES their investment. That is roughy 50% to 80% ANNUALIZED! A whole lot more than what the no-risk bank would give them, or the typical 10% annualized return from Wall Street. Where does this return come from? The value of your venture in 5 years will be greater than what it is today. How much greater ... 10 to 20 times! In the example below, the venture valuation goal in year 5 is 20 times startup ... $8 million. That is a GOAL for the company, but the company has 5 YEARS to make it happen. YES, it CAN be done.

5] Rough estimate, if this company needs to be worth $8M in 5 years, its revenue for that 5th year should be in the ballpark of $8 million. Yes, valuation of the company AND revenue are both about the same. ROUGH estimate, but a reasonable one to use to CALIBRATE your financials. If this company is going to generate $8M of revenue in year 5, how many "cookies" will it have to sell? A lot! A whole lot! But it also has 5 YEARS to make it happen.

6] Suggest you use this process to APPROXIMATE and "CALIBRATE" your financials. Now ... this process has a lot of assumptions. A WHOLE lot of assumptions. The most fundamental assumptions is that this company has been managed well during this 5 year period. No funny business. Good cash flow, good balance sheet, no major down-side issues like getting sued for patent infringement, et al. GOOD management. Legal, moral, ethical. YES, that IS how you will manage your venture.

7] The numbers below favor the INVESTOR. A 20x return is on the high end of expectations for a good, solid business plan and a good, solid team. Less than 20x is more favorable to the startup team. Less than 10x is minimizing the risk of your startup and prospective investors will think you're getting cocky. More that 20x and the startup team is telling potential investors that they think risks are REALLY high. The range to target is 10x to 20x ... the risk-return multiplier. "Calculate" (an estimate, really) this number LAST. If it's between 10 and 20, nice!!

8] Everything here is subject to change, and likely to have "exceptions" for this or that. Every investor looks at things a little differently. And every venture IS different, even if they are similar. So get used to investors and judges and mentors and advisors giving you different advice and perspectives. There are multiple paths to success. Be careful not to stray too far from your chosen highway! The biggest money issues I've seen are 1] the numbers don't "fit" together, and 2] the numbers are way outside the "rational ballpark".

9] Let me know however I can be of help to you ... jj

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How much money do we need to start our venture?

It is usually not a fixed dollar amount ... most often, it's a range of desired funding versus the time for the venture to become stable (that is, consistently break-even). Too little money and the venture will not survive, too much money and some will be wasted. The optimal amount is a trade-off with the length of time it will take for the venture to become stable (that is, consistently break-even week after week). The management team needs to know what results they can deliver if the investors do pony up the requested level of funding ... and what could happen with less money raised, or more money raised. The results are usually, but not always, a change in the time to become a stable company.

A "lean" startup is a special case ... the venture is basically trying to launch and operate below the minimum level of funding need to become stable. Think of it as an experiment. There are things to be learned in a lean venture, and often the most important lesson is that the venture just isn't going to make it without a critical mass of resources. Another lesson is that money isn't the only answer. Too much money can actually be a bad thing, but usually not as bad as too little!

In general, the more money raised for a new venture, the faster that venture can become stable up to a point. Investors will often ask the range of funding the venture is seeking. What's the minimum level of funding to get it going and sustainable, and how long will it take? What's the minimum time to become stable, and how much funding will it take? And finally, ... what does the venture team believe is the optimal trade-off between time and money?


A little humor: I once made a presentation to a group of "friendly" investors. Call them "friendly" because they already knew us (the management team, had put a good deal of money into our venture, and were (currently) satisfied with the results. Now, we were seeking to raise new money for a spin-off. In my presentation, I said we needed to raise $x million and it would take us about y months to get the new venture stable (consistently break-even). One of the investors asked what could happen if they put in half the money we were seeking. I said the venture could still probably make it but it would take so many months longer to stabilize, but that level of funding was still above the failure threshold. The same investor then asked what could happen if we were able to raise three times the money we were seeking. The "wise guy" in me came to the surface. I said that level of funding was way above the amount needed to make it to the shortest possible time to stability, and that the management team would take the excess funds and all buy Porsches because the venture didn't need the money! I point out again that these were "friendly" investors and I knew they had a sense of humor! They didn't throw me out the door. Rather, they had a good laugh and said those were exactly the "right" answers ... they were just testing the management team to make sure we knew where the endcaps were! --Jim

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Jim Jindrick

You can send Jim Jindrick a message here: TextJim.VentureNotebook.com Jim's books are available here: Amazon.com/author/JimJindrick

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