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, nominal to hit stability (self-funded, break-even?), and optimal (move fast to grab market share before others can do so). In the example below, this company nominal 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".
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