5 Things Investors Need to Know About Your Startup’s Money
Money, and lots of it. Starting a business or having a startup revolves around this principle, so do your investors. They want to know how much money your startup is going to make, how soon your startup will make that money, and how much money they (the investor) can pocket. Here are 5 things angel investors want to know about your startup’s money:
1. How Much Money Does Your Startup Need?
Figuring out how much cash is required to start your business is the first step. Be careful to only ask for what you need. The #1 mistake Entrepreneurs make is asking for too much money; or too little. Each time you get funding, you’ll be giving up equity. A start up will need many rounds of funding throughout it’s life time. Some entrepreneurs prefer to raise enough money to get to a certain milestone, some prefer to raise it all at once. If you ask me though, raising at milestones is better.
Start with your cash flow projections for the next 12-18 months; as well as how much cash is needed for the next 3-5 years. The rule of thumb is to overestimate costs, and underestimate income. Don’t be too conservative though, angel investors will naturally downplay your projections. Try EZ Numbers for a great professional tool. The guy that developed this software is actually a financial consultant for startups.
2. How Much Money Will I Get In Return?
Angel investors turn to high risk businesses and startups because of the potential return. If you think about this, who wants to invest in the stock market anymore? It makes sense to invest in a new business. The average seed stage angel investor seeks a ROI of 34% (but can be between 20-40%). Return on Investments should include:
- All projected investments, this includes future investing through exit.
- All financial gains to the investor, this includes payouts, paybacks, and proceeds of sale.
- Time from initial investment to exit.
3. When Will I Get My Money Back?
This is a big one. This is your investor’s exit strategy, which all investors want. A common mistake as well, is your angel investors often don’t exit during an acquisition or IPO. They usually exit via a buy-back of shares by the founder or business owner, a new partner, a buy-out by a Venture Capitalist. You’ll find each investor also usually has a time period that they want to hold their shares. Some like to hold longer then others, some like to get out as soon as possible.
It also depends on how they invested their money into your business. This could be via equity, convertible debt, or other forms of structure. They’ll also want to know the priority of them getting their money back from your startup. Certain shares in a company have a priority of payment over other shares.
4. What Stage Are You In?
How much cash you ask for should be appropriate for the stage your business is in. Reason being, the further your business has developed, the less risky it is. Don’t ask for $1 million if you’re doing research & development. For an in depth look at start up stages, read my post “The 7 Stages of Start Up Cash“.
5. What’s your Valuation?
There are two types of valuations: pre-money valuation and post-money valuation.
- Pre-Money Valuation- Since there is no “real way” to determine how much your business will be worth, angel investors typically negotiate this with you. Negotiations are based on intellectual property potential, market size, competition, trademarks, patents, etc. If you have revenue, they could also base it on that.
- Post-Money Valuation- This is the value of your business right after a round. Post-money valuations are determined by adding the pre-money valuation, and the total money invested during the round.