Ideas|Products|Startups|VCs

At various stages of the company’s growth and development you as founder will attract different kind of investors and they will have different expectations.

Strong ROI

• To begin with generally founders raise money from 3Fs (friends, family and fools). 3Fs have sole intent in helping the founders and have faith in their capability.  Then comes the angel investor who is taking on the most risk by investing when the company is in early stage and has yet to generate much revenue but prototype is made or and have beta users or few paying customers.Angel investor looks to make 10-20x for their investments and its justified since they take major chunk of risk. In general angel investor will sell out during one of the subsequent financing periods. Very rarely does an angel investor stay on board until the company reaches maturity.

• Venture capitalists come in later but still before the company is cash flow positive or about to breakeven. Therefore, they typically want returns of 5x for a period of 5-7years. Mezzanine financiers provide a mixture of debt and equity to more stable and established businesses so they expect blended returns of 30-40%.

2. Pay off time –

• Very few investors wish to wait indefinitely for their money. They are investing not to make you feel good but because they believe in you and your business and the ability of the business under your management (and sometimes with their additional efforts) to generate enough revenue and cash flow and/or grow large enough in value to return them their investment and their expected return within a specific time frame.

• This varies based on the investor. Angel investors prefer a shorter period of time (3 years). Private equity funds typically expect 3-4 years. VCs tend to  derive a number of benefits, so their investment are longest with a period of 5-7years.

3. Management Team

• Investor looks for great team and founder who can spearhead the vision. There are many great ideas out there. It’s not so much the idea that counts but the ability of the management team to capitalize on that idea.  The management team is the most important component. A great management team can make a good idea or a so-so company into a great company. But a great idea may never make it off the ground with poor management and a great company can go rapidly downhill with mediocre management.

4. Company Valuation

• You shouldn’t look like a fool while approaching investors without knowing the worth of your company. Spend some time do some homework, check with your fellow entrepreneurs or hire a finance consultant to evaluate the base valuation of your company. Would you know if the investor is proposing a good price for the portion of their investment? Sometimes angel investors aren’t highly financial savvy and can’t do their own valuations. You need to demonstrate how their investment will help move your business to the next level and they will be keen to know how  requested investment amount was deduced. VC firms will do their own valuation but you should be ready with yours and this will facilitate your negotiations with these firms.

5. Business Plan

• Business Plan is a critical component and investors look into it quite seriously. Good business plan should cover an overview of the market, Gap/Paint points in the market, your proposed solution to address the gap, background on the business, industry and competitor assessment, management overview, sales and marketing plan, risks, financial snapshot, goals, and the strategy to accomplish these goals. Some investors only want to see an Executive Summary – 3-5 pages – to determine if they’re interested. Then, once they’ve expressed full interest, they’d like to see the complete business plan.

I have failed to understand why startup guys and entrepreneur think its pretty easy to raise venture capital, may be they get to read lot of investing news at TC.

Lot of people have approached me asking to help them in raising venture capital and most of those people are working in big MNC software companies. They have a simple idea and would want VC backing in developing their product. Their dreams are shattered when i bluntly tell them it won’t happen, you need to pump in your money during the development.

There is a clear misconception in the market about the funds and type of funds, lets try to make it simple by defining different types of funding -

a) Seed Funding – Seed funding is the very first investment an entrepreneur receives and mostly its raised from family and friends (F&F) and also sometimes referred as FFF – friends, family and fools. Generally seed fund ranges from $10-25k.

F&F is a risky venture for those with the money because the project that they are funding may not be more than just functional specs or drawings, not sure of product can be out in the market.

b) Angel Investors - Angel Investors are individuals who invest their own personal funds in an idea or a company that they feel strongly about. Most of the angels are seasoned entrepreneurs, company executives, HNI’s. Generally the fund angle investors lend is in the range of $100-$500k.

c) Venture Capital – In simple words they are biggest money lenders for startups and growth stage companies. Venture Capitalists are generally small teams of investors with sufficient backgrounds in the fields in which they are investing. New ventures will seek to raise funds in rounds of funding called “series.” Often times when researching companies you will see that Company X received $4M in Series A funding and $5M in Series B funding. Generally, the more series of investments, the more promise VCs, Angels or other investors see in the company. Generally they invest above $1M.

-Hitesh, vcBytes.com