If you intend to secure external funding for your startup, you may consider seeking investment from angel investors. Angel investors are affluent individuals who provide capital for business startups in exchange for a share of ownership equity.
Angel investment serves as a first round of financing following initial seed funding from family and friends. Additionally, angels are often successful entrepreneurs, business executives, or attorneys who can offer management, leadership, and guidance to your startup.
This series of posts aims to provide insights into the criteria angels consider when investing in a startup. These posts will assist you in understanding an investor’s perspective and assessing whether they would be willing to invest $100,000 in your business. Utilize these posts as a tool to evaluate your business’s strengths and weaknesses.
Regarding funding options and methods, please refer to my post “Funding Your Start-up The Jugaad Way” for alternative and potentially less costly ways of raising capital. Regardless of your chosen funding path, it is imperative to prepare a well-crafted investment pitch that can significantly impact the success of your startup launch.
#6 Valuation
Determining the value of a start-up presents a complex challenge, particularly in the absence of liquid assets, tangible property, or substantial income. Consequently, the valuation process involves a combination of art and science, extending beyond mere asset assessment to provide a comprehensive financial roadmap of the company’s current value and future trajectory. A well-crafted valuation serves as a protective measure for both founders and early investors, safeguarding their interests against dilution during subsequent investment rounds.
The primary objective of valuation is to establish the startup’s worth, enabling founders to determine the percentage of ownership they must relinquish to investors in exchange for capital. In the early stages, the company’s value is typically minimal, primarily based on its potential rather than tangible assets. However, the initial valuation must be substantial enough to facilitate share creation, as offering a mere 10% of nothing is unwise.
A crucial aspect of valuation is ensuring a high enough initial valuation for the startup’s growth. As the company expands and ownership dilutes through subsequent investment rounds, the founder’s ownership value should experience significant growth. Therefore, it is essential to construct a robust exit strategy from the outset. For further insights, refer to the excellent article and informative graphic on valuation.
Consider a simple example of a first-round start-up valuation. An investor seeks to invest $200,000 in exchange for approximately 10% of the company’s ownership. The pre-money valuation, calculated before the cash investment, is $2 million. However, this figure does not necessarily indicate the company’s potential sale price. Instead, it determines the percentage of ownership that investors will acquire through subsequent rounds.
It is paramount to comprehend how ownership percentage dilutes with each additional investment round, bringing in more capital to fuel the company’s growth. Negotiating a weak starting point, such as a low initial valuation, can lead to a disappointing exit from the company years down the road. It is undesirable to find oneself selling a $50 million company that was conceived and nurtured with tireless effort, only to discover that your ownership stake is worth only a fraction of a decent salary.
– Tyler, Founder and Principal Consultant
Thrive Venture Consulting—connecting people and ideas.