Hey guys, We're building a community for startups and entrepreneurs (http://teamstoryapp.com) iOS is currently live with invite-only: https://itunes.apple.com/gb/app/teamstory/id834137499?mt=8 and Android is in development right now (launching in summer) We have angel investors reaching out to us and asking about the valuation & pre-seed investments. We are just wondering how much we should raise in this case... 1. What are some valuation range for a startup / product like this? 2. How much of our valuation should we give to the investors (we're talking about a small investment like 50K) 3. Should we get investments at all for now? Right now we're silent launch with 300 iOS users and 1000 on waiting list on both android and iOS. Thanks
When most people talk about raising funding for a mobile app or a start-up, they immediately jump to venture capital. That makes sense: VC investments are often talked about in the media, and because venture capitalists make some of the largest investments, they tend to be the “big fish” of the funding world. However, venture capital firms are not the only possible source of funding. While it is less glamorous, one of the first places that most entrepreneurs look for funding is their friends and family. Unless you come from wealth, friends and family (F&F) money will usually be small-scale, initial investments made partially to seek a return on investment and partially because the investor knows and believes in you. That said, just because you know the people investing does not mean you do not have to treat them like investors. Ultimately, if someone puts money into your idea, you owe them a return. Do not take these initial investments lightly. You will need to present a good case for why your idea has merit, and especially at this early stage, you will need to stretch every dollar as far as you can. If people see that you use your investment money wisely, they will be more likely to invest more later. While many are quick to dismiss it, F&F money can be a meaningful source of capital when just starting a business.
Raising even a few thousand dollars can help with the initial expenses of testing and validating your idea. I will still say that it is not limited to a few thousand dollars or 50k because it all depends on the type of Seed funding option you select. Many companies have raised more than a million dollars by Seed funding alone.
1. Crowdfunding: With more than 500 crowdfunding platforms currently active, this has become one of the most popular avenues of seed funding. Crowdfunding platforms are usually open and anybody in the world may end up backing the concept, idea or product. Some examples of successful crowdfunding campaigns include the Oculus Rift which raised more than $2 Mn, Pebble wearables which raised more than $10 Mn, and Indian company Exploride, which raised more than $500K for its heads-up display for cars.
2. Corporate seed funds: This is a great source of seed funding as it comes with big visibility for the start-up brand. Tech giants such as Apple, Google and Intel back start-ups regularly with seed money. Big companies often look at start-ups as a future source of profit, IP or talent, and that is the primary motivation for investment here. GV is the investment arm of Alphabet (Google’s parent company), while Intel Capital is chipmaker Intel’s dedicated division for start-up investments.
3. Incubators: Incubators generally provide small seed investments and offer services such as office space or management training. Most incubation programmes do not take equity from the start-up but do offer support beyond just funding. The Indian Angel Network Incubator, IIT-Bombay’s Society for Innovation and Entrepreneurship or SINE, Khosla Labs and state-backed incubators such as T-Hub and KSUM are some of the most active incubators in India.
4. Accelerators: Accelerators are more focused on supporting start-ups in scaling up their business rather than backing and nurturing early-stage innovation. Accelerators also back start-ups through small seed investments along with professional services, networking opportunities, mentoring and workspace. Unlike most incubators, most accelerators take equity as they are privately funded. The popular accelerators include Y Combinator, TechStars and 500 Start-ups.
5. Angel investors: Angel investors are individuals that offer capital in place of ownership equity or convertible debt. They are called angel investors because they provide capital at times when the risk of a start-up failing is high, which is during the early stage. In India, the top angel investors in H1 2019 are Sanjay Mehta with eight deals this year, followed by VC Karthik, Siddharth Ladsariya, Sharan Aggarwal and Sachin Tagra – each adding seven deals.
6. Personal Savings: Founders may put in their personal wealth and savings as seed funding. Also known as bootstrapping, this brings extra financial pressure but there is no pressure on founders to return borrowed money.
7. Debt Funding: Debt mostly includes money taken from banks as loans or borrowed from friends and family. Sometimes, venture capitalists or angel investors also issue loans instead of equity investments to ventures in sectors where cash burn is high, but so is the traction.
8. Convertible Securities: These are investments which start off as loans but change into equity or shares depending on the progress of the company, and when it reaches certain milestones such as sales or revenue targets.
9. VC Funding: Venture capitalists are marquee investors that provide funding based on several parameters such as growth potential, market conditions, founder vision, idea or simply execution. In return, they take some portion of equity or stake in the start-up. VCs usually join multiple rounds of investment after seed stage, if the start-up managers to reach those rounds. For seed funding, Accel Ventures, Seed fund, Sequoia Surge, Axilor Ventures, SEA Fund are some of the most venture capital firms in India.
10. Angel Funds or Angel Networks: Sometimes, investors come together to form angel networks or groups where they each invest small amounts in the idea or the company during the early stage financing round. The major angel networks in the market currently are AngelList, Indian Angel Network, Lead Angels, as well as angel networks for each major start-up hub in India.
The answer to your question as to how much valuation you should you give to the investors is simple answer. The simple answer is the absolute minimum amount you need to make your plan work. Some entrepreneurs try to start with a huge number, hoping they can negotiate and close on a smaller one, while others understate their requirements, in hopes of getting their foot in the door with an investor. Neither of these strategies is a good one, as both are likely to damage your credibility with potential investors, even before they look hard at your plan. Here are the parameters you should use in sizing your request—and be able to explain in justifying your request to investors:
1. Consider implied ownership cost. If your company is early stage and has a valuation under $1M, do not ask for a $5M investment. The investor would be buying your company five times over, and he does not want it. If your valuation is around $1M, you can validly ask for $200K–$300K and offer 20–30% of your company in exchange.
2. Type of investor. Angel investment groups usually won’t consider a request over $1M, while venture capitalists won’t look at anything under $2M. Amounts of $100K or less, are usually relegated to “friends and family.” Approaching any one of these groups with a funding request outside their range is a waste of your time and theirs.
3. Company stage. If your company is still in the “idea” stage, you have no valuation, so size your investment request based on goodwill that you have with your rich uncle, and your business track record. Angels might be interested during your “early stage” if you have a prototype, but VCs will not bite until you have a product, customers, and revenue.
4. Calculate what you need and add a buffer. Do your financial model first with the volume, cost, and pricing parameters you want. See where your cashflow bottoms out. If it bottoms out at minus $400K, add a 25% buffer, and ask for $500K funding. The request size must tie into your financials to be credible.
5. Investment terms. The most common case is an equity investment, but there are many terms that can impact what request size is credible. I’m talking about things like anti-dilution clauses, preferred versus common stock, valuation tied to later rounds, warrants, and bridge loan options. More restrictive terms reduce the credible investment amount.
6. Single or staged delivery. In many cases, a single investment request may be scheduled for delivery in stages, or tranches, based on milestone achievement. Obviously, this reduces investor risk and allows a larger commitment, since they can limit their loss if you fail to meet key objectives.
7. Use of funds. Investors expect to see a “use of funds” list, and they expect the uses to apply only to your core mission. In other words, do not tell investors that you intend to buy a fancy office building or executive cars with your funding. Even executive salaries should be minimal at this stage.
8. Projected return on investment. Most entrepreneurs skip this step, but it helps your credibility to include it. Estimate a return on investment (ROI) by projecting company valuation at exit, to show the investor who has 20% what he will get back for that initial investment. He is looking for a 10x return since he assumes only one in ten survive.
Obviously, determining the proper size of your investment request is a non-trivial exercise, but it’s one of the most critical factors for investors in making a decision to invest or not to invest in your company. You need to get it defensibly right the first time because changing your request under pressure will kill your credibility.
Nowadays, technology has enabled founders to rapidly build a software product or hardware device in a short period of time and get it out for the investors to judge for themselves. Once they get to know the product, the first thing that will be assessed is product-market fit. Without projected growth numbers, this is a crucial part in a start-up’s early journey. It will be quite hard to convince outsiders to support the product if the market-fit is not great. So, have answers for questions about the following major points:
1. What is the market opportunity?
2. Who is the target audience or customer?
3. How does the product solve an existing problem?
4. What will be the adoption rate?
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath