Lessons Learned Seeking Funding -- A better way to value your startup

Determine...

1. the size of the existing market
2. the size of the potential market
3. when the potential market will go from potential to existing
4. will the existing market sustain the existing industry profitably
5. how much of the existing market do you need to survive.   can you get it.  when.
6. how much of the potential market do you need to be profitable.  can you get it.  when.
7. discount this backwards to today.
8. discount it further by the risk.
9. your investor won't want to stay in forever.  when can they exit?
10. step back and see if these numbers make sense.

Lessons Learned Seeking Funding - Be realistic about the value of your company.

  Overvaluing your startup can be a deal killer.  Here's why.  At some point, most startups need to determine a value for their endeavor in order to raise money.  There is real potential -- even an incentive -- for company owners to inflate this value.  The logic goes something like this:

We need $500,000 from an investor.  If our company is worth $1 million then the investor will wind up owning 50% of the company, so let's jack up the value to $5 million so the investor only gets 10%.  

Investors will be on the lookout for it, they will spot it, they will test it, and if the owners can't prove up the valuation to the investor's satisfaction then the deal will probably be off and any potential relationship will be over.  The company would then have two problems:  1] they still need to raise money, and 2] they now have to explain to the next investor prospect why the previous prospect balked.

This is the wrong approach.  Don't use it.

Lessons Learned Seeking Funding - In the early days, don't rely on just one or two investors for all your capital.

  Here's why.  Sooner or later, lots of deals need more money than their management originally thought.  In those situations, it is much easier for all involved to raise that additional cash from, say, six to ten investors than it is from just one or two.  If you have just a couple of investors, and they turn you down for more money, then you have to 1] go to newer investors, who will know you are in a tight spot, and 2] figure out how you're going to dilute the ownership of the investor(s) already in the deal.  It won't be fun.

Lessons Learned Seeking Funding - Whoever does the talking needs to have skin in the game

  Why?  Because potential investors want to build relationships with fellow travelers -- people who will be there through thick and thin to make the deal work.  This person does not have to be the lead investor, but they need to have significant cash at risk.  Note that it needs to be cash at risk.  A consulting fee does not count, even if it is subject to some successful outcome.  Further, that cash needs to be at risk on the same terms as the prospective investor's cash.  Otherwise, potential investors will probably conclude that this person they are building a relationship with may never be seen again.  That would be a mistake.

Lessons Learned Seeking Funding -- Ventures need a "lead" investor

  The "lead" investor is somebody who has invested in similar deals before and has been successful.  They know the industry(-ies), the players, the rules, etc.; they have credibility and do most of the talking in meetings with potential future investors when the company is ready to ramp up.  The lead investor does not necessarily have to be the first person to invest in a venture, nor do they have to be the biggest investor in the deal, but their investment should be substantial and it should be long-term.  Obviously, it helps if the lead investor knows -- or, perhaps, develops meaningful relationships with -- VCs or other candidates for subsequent investment.

Lessons Learned Seeking Funding -- New investors will not reimburse previous expenses

  Investors who join a venture that is already established want their money to be used on projects and/or operations that occur after they make their investment.  This is especially true of professional, truly arms-length investors (not friends or family).  They do not want their money to be used to pay old bills.  It is important for the initial investors in a venture to be aware of this; the money they put into the deal will not be returned or reimbursed to them by subsequent investors.  In other words, their money could be in for a very long time.

An exception to this would be when a subsequent investor buys out an investor that bought in to a deal earlier.  However, it is unlikely that that would happen without a deep discount.

Lessons Learned Seeking Funding -- The right number of people to meet with prospective investors

  Generally, if you're seeking funding you want the right number of people from your side attending meetings with investors (or donors), especially exploratory meetings.  My preference is to have one or two key people, three tops.  More than that can be a problem.  Here's why.

1. Especially in the early stages, a relationship is being built and trust is being established.  Having excess people in the room can distract from that goal.
2. You want all parties to leave meetings feeling as though something significant has been accomplished -- the ball has been moved downfield.  Having too many people with too many different agendas, lines of questioning, approaches to the problem, etc., can clog the conversation and prevent that from happening.
3. The simple fact that one side brought many more people to the meeting than the other can become the most memorable aspect of a meeting, distracting from the point.
4. Too many people in the room, especially on the side of those seeking funding, can come across as weak.  Why did so many people come?  Is there a lack of trust?  A lack of shared belief in other peoples' abilities?  Is somebody afraid they're going to be left out?  Is somebody desperate?

While I have seen the above happen on several occasions, there can be exceptions.  In situations where there are multiple kinds of expertise involved you may need several in the room.  Or you may want to create a feeling of superiority over the other side to drive home a point.  In those case, definitely bring all the people you need.  Otherwise, limit the number of participants to just the people needed to build and improve the relationship.