What Kind of Return Do Investors Expect When They Invest In A Startup or Small Company for The Long Term?
They say venture capitalist would like a 40% IRR which is an approximation of their ROI, but this is all fantasy based on assumptions that drive the financial projections. Pessimistic projections can be used to negotiate lower pre-money valuation prices. So the CEO/Founders are selling the potential while the investors are selling the downside risks.
Angel investors would like to see good returns like this too, but are unlikely to develop their own models to their own assumptions as the amount of work involve is large, and they have no associates to do that work. Angel syndicates on $1M+ deals might do this work though and use their results to negotiate equity prices.
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The reality is few deals ever perform anywhere near their projections as there are too many unknowns that early on to have any confidence. The numbers will be rerun every time there is a learning experience and could go up or down dramatically. Angels are protected...
What Kind of Terms are Reasonable to Provide Angels and Venture Capitalists?
This is a big question and the deviation is very large depending on many circumstances. However, I will give some baseline information to help you prepare for the negotiation of terms. Your mileage will certainly vary.
Angel investors, early on, will not get anything except a promise of equity later via a convertible note or SAFE note. Their ownership stake is too small to have any real control, and the legal structure of a note gives them no real voting authority at annual stockholder meetings. So, control is usually not a big issue unless an investor is large enough to request certain covenants or guarantees. Giving out any rights at this stage can cripple a company to get the next deal done, so it is advisable to have a clean and simple note without any special privileges except the conversion discount. This might be warranted with a $250K plus investment. In this case the investor may want a board seat, board observation seat (non-voting member) or a special discount on...
What is Necessary for Due Diligence to be Prepared?
This varies by the amount of money being raised and stage of development of the company. I have posted a due diligence checklist on my blog, you can find for full detail.
Any amount over $1M will likely require substantial look into all company officers, financial statements, customer records in addition to review of the company’s business plan and product(s). Expect serious investors to ask about everything you can imagine. And the more open you are, the better. Although VC will likely refuse to sign NDAs as many of these would place too many constraints on them over time, this does allow you to withhold some trade secrets and protect your “secret sauce”. This could be your source code, trade secrets and algorithms or other secrets you do not want to expose to competitors. This is a big gray area and negotiable, but you should be careful, as VCs are not prevented from investing in your competitors after pulling out of your deal. And they can legally transfer...
How do I know I'm ready to approach outside investors to raise capital?
Well, this is art more than science, so you will need an expert in raising capital to review the materials you have prepared and tell you your materials are of sufficient quality. These materials should include the following, even at the seed stage, even though the bar for quality and completeness will not be as high:
- Pitch deck
- Business plan with market research, competitive intelligence and the business model you have designed to be unique in the marketplace
- Team resumes in detail with every job (no holes)
- Financial projections
- Product offering and any sales and marketing results that can drive the projections. This includes Customer acquisition costs *CAC) and lifetime value (LTV) of a customer.
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If you do not have quality versions of all these things, you are not ready to...
What kind of business plan do I need to attract outside investors?
Typically, you need a 20 to 40-page plan that discussed each of the five key areas of the business, which are marketing, sales, product development, finance and operations (delivery). You will need this read by an objective and experienced expert for feedback. It is highly likely that you are both too close and not experienced enough (as an investor) to know how good the quality of this plan can be ranked.
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See links to other blog postings that list more detail on what is needed to approach outside investors. Most people blow the opportunities by approaching the contacts before they are properly prepared.
How to Raise Millions for Any Company - Online Video Course
Bob Norton is a long-time Serial Entrepreneur and CEO with four exits that returned over $1 billion to investors. He has...
How Do You Go About Finding Outside Investors and What Does It Take?
Networking is always the best method to build your universe of contacts. Historically this was done by attending investor pitches, meeting other CEOs and Founders and working with consultants to target specific categories and profiles of investor. However, with COVID and more technology and social networks there is an increase in cold outreach through platforms like LinkedIn, Angel.co, angel syndicates and other platforms that allow you to publish your profile. Of course, crowdfunding is also a way to find angels, as these platforms have member that are active and want to invest small amounts in many deals. This however a very different strategy with a different marketing and sales plan than approaching traditional angels and VCs.
One key strategy is to back trace investors who made money in the sector before from SEC filings on IPOs. This can point you to individual investors as well as venture capitalists and even corporate investors.
How big are typical venture capital investment valuations at each stage of development?? Series A, Series B, and Series C?
This is best answered by this diagram of statistical information. However, be aware these are the deals that report only and not all deals and so likely higher than the true averages because smaller angel deals are less likely to report to PitchBook.
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No one really knows or can get data on all deals as they are private and may be between the company and on angel investor.
I would guess these valuations are doubled by missing so many of the smaller, seed deals that go unreported. Many companies start with a single $50K to $100K angel which is enough to get a product finished after the founder’s invest sweat equity and some of their own capital while bootstrapping.
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How to Raise Millions for Any Company - Online Video Course
Bob Norton is...
Should I hire a consultant to help me raise funding from outside investors?
Yes, assuming you have not successfully closed a similar round of financing before, this is a good idea that will generate a large return on the investment. It is likely the difference between success and failure, or at least getting a deal done in six months instead of two years of very expensive “learning”. The financing process is complex, and most will learn the hard way over many months or even several years of mistakes. The lost opportunity cost can be millions. This is super dumb when compared to spending a few grand on a quality consultant with experience in this area. Not a “finder” though. They are mostly scammers.
Most will absolutely need help with the following tasks, ideally from an experienced CEO that has done this exact task before:
- Validation of your market entry strategy. This is key, and most people get it wrong with a short-term vision instead of a multistep entry that broadens the company’s focus to larger...
How hard is it to get outside investors and Do I need revenue to get outside funding?
Very hard, maybe 1 in 400 deals VC looks at will become a closed deal that they invest in. Most go in the circular file. More than 90% of companies never get any outside investors of any kind. This does not include bank loans based on assets and cash-flow which is much easier to get because the banks (not investors really, they are lenders) have security and do not take risks like early-stage investors.
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Although revenue is helpful, and opens many more options, it is not required by angel investors. Most VCs require some revenue to know you have a proven “proof of concept” meaning both a product and a market/sales process that can close deals. This is less true in biotech, pharmaceuticals and medical where product development approvals are far longer and may require FDA approval.
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What kind of capital should I raise?
This table shows the typical sources that are best based on your company’s stage of development. Your mileage may vary.
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| Friends & Family | Angel Investors | Venture Capital | Crowdfunding |
| Usually Called | Friend and Family Money | Seed or Bridge | Series A, B, C etc. | Several types depending on size. SEC regulated. Types are CF, A which have different requirements for reporting, etc. |
| Employees | 0 to 10 | 1-15 | 10+ to 500 | 0 to infinity |
| Annualized Revenue | $0 to $500K/year | $0 to $2M, more the better. Path to profits with scale clear | Rarely $0 or less than $500K annually, but can be any amount. | $0 to $2M, more than that you may have better sources that can be more helpful. |
| Product Maturity | Idea to prototype | Close to or have an MVP already. | Working product with likely improvements in the pipeline but operating at many customers. | Idea to $2M annual revenues. |
| Deal Structure | Convertible or SAFE note with a discount on the... |
