The question that is probably at the top of the list for every entrepreneur seeking funding is this: “How much of my company will I have to give up to get my desired level of funding?” The unfortunate answer is, “It depends.”
Investors consider many different factors and each investor knows what is important to them and what is not. That said there are some general questions that investors ask themselves when considering funding.
Some examples are:
1. How attainable are the goals set forth in the company’s business plan?
Sophisticated investors are sophisticated analysts. If they think there are items in your business plan that are unrealistic, they will normalize them to something they’re more comfortable with.
2. When will the company be able to go public or secure a buyer at an attractive price?
The longer an investor has to wait for exit, the lower the value, or What will the appetite be like for IPOs when the company is ready to go public? A bullish stock market will support IPOs at higher price to earnings ratios thereby raising the value of your company and reducing the amount of equity an investor will require in return for their funding.
3. Will the company need more money before exit?
4. How much does key management have invested in the company?
If management has a significant amount of their own money in the company the investor will assume that management is committed to success.
5. How much of the initial investment will we get back if the company fails?
6. How will my investment be structured?
If an investor puts all of their money into stock as opposed to a less risky instrument, then the price of investment will go up.
Bottom Line
Once investors answer questions such as these, they will then begin to make adjustments to your business plan and consider their risk accordingly.
It’s all about managing their risk and you need to be realistic in the actual value of your company to attract the real investors to fund your deal and to convince investors your business is ready to grow, before they’ll get excited enough to move.