Venture/Angel Capital: What should I expect to get?

[cyman]

Hi there,

How much should I expect to get for X percent of my business?

This is a question I think of every time I think of getting external financing.

Are there any books or articles on this? What do you think?

My example:
I have a small online business that generates about $12,000-$14,000 in revenue per month. Cash flow is very positive, I have a small office. Growth is happening slowly, but I really don't want to wait 2 years to get to the next level. I need more marketing dollars. I am financing it entirely through revenue out of operations, and some loans.

What should I expect in terms of a deal with an angel investor, or any investor, to take things to the next level?

And, here's the irony:
I've seen people who start with nothing and get $1 million dollars for 50% of absolutely nothing.

So, given that I could use $100,000 entirely for marketing purposes, what should I give?

This question is why I never went to external investors! I really need any examples, books, or research on this topic.

[NimaHeydarian]

Usually you should expect half the values of the company and you would have to give up half of the ownership...

But again, the VCs don't give you all the money up front. You and VCs will set goals along the way and as you meet them, the VCs will release more of the money they agreed to give you

[jasaunders]

You're out of the leagure for VC, but regardless, ownership will be determined based on the valuation of your business. Therefore, there is no set answer to your question. Additionally, everyone's valuation method will be different. Two competent investors can use two valuation methods and come up with completely different estimates. Likewise, they can use the same method and wildly different assumptions and come up with two completely different estimates.

The answer is, there is no answer. If you want a rough estimate, you would do a valuation analysis on your business based on reasonable assumptions. Look at a few different methods to determine what range you might reasonably expect from investors. But there is no answer, its all up to the investors.

[cyman]

Hi guys,

Thanks for the scoop so far.

How does this make sense:
- Someone starts a company from nothing, and raises $1 million dollars worth of funding for 50%.

- But a company which was bootstrapped, already running, already has contracts and making about 15K/month gets 50% of the current market value (maybe 24X monthly revenue, or $360K / 2 = $180K).

How does that make sense, or am I missing something here?

Also, Josh, when you say, "out of the league", please elaborate on that, and how one would get "in" the league.

Keep in mind VC money is not necessarily what I'm looking for. More like angel funding or just investors in general.

[akula]

Hi guys,

Thanks for the scoop so far.

How does this make sense:
- Someone starts a company from nothing, and raises $1 million dollars worth of funding for 50%.

- But a company which was bootstrapped, already running, already has contracts and making about 15K/month gets 50% of the current market value (maybe 24X monthly revenue, or $360K / 2 = $180K).

How does that make sense, or am I missing something here?

Also, Josh, when you say, "out of the league", please elaborate on that, and how one would get "in" the league.

Keep in mind VC money is not necessarily what I'm looking for. More like angel funding or just investors in general.

welcome...okey..well...I don't think I'm gonna write too much, because institutional venture capital is unsuitable for your business at this stage, but I'll cover some of the points you raised.

1. Are there any books or articles on this?
Yeah, look at the links in my signature. these are vc blogs (i.e. online diaries written by venture capitalists). Use this custom search engine to read the advice that practicing venture capitalists give to entrepreneurs about raising capital.

2. How does that make sense, or am I missing something here?
Yes, you're missing the point. In venture capital, deals get done for a lot of reason. As far as IT goes, the current/potential revenue of the investee is often not the most important reason. The important reason is ecosystem fit..which basically means, "how easily can we sell our investee to someone like yahoo"...so, to answer your question, the reason why some "built to flip chop shop with no hope of ever making a dollar in revenue" is able to close institutional vc over your company, is because the former presents an easier exit than the latter.

Now..this of course leads to the question of "why is a company without revenue easier to sell than a company with revenue?"..but I'll avoid answering that for now, since that's not what you're asking.

3. How one would get "in" the league?
What Josh means is that a 100k investment is too small for a vc manager, even for a tiny fund like Union Square Ventures (which holds about 150m). In other words, for a 150m fund, the absolute minimum I can spend is 500k on a deal, because any less than that would not move the needle for my expected rate of return...so, if you wanna get in league, raise more money...but it's also a lot more complicated than that

At any rate..since you don't fit the vc profile, I'll stop there. It's gonna be a lot easier, cheaper and quicker to raise alternative forms of finance, so I recommend you do that.

[csabthehun]

Hi cyman,

The books I would recommend are "The Art of the Start" or "Reality Check" (this one just came out, so it should be much more relevant), both by Guy Kawasaki (an entrepreneur and venture capitalist himself). Also, check his blog which has tons of awesome advice on entrepreneurship and VCs.

See ya,

Csaba

[cyman]

Hi guys,

Thanks for your assistence here. One more question for everyone, especially the experienced people out there, like akula and jasaunder...
What was your own financing path and history?

For example, did you start with 10K of savings, 30K of loans and work up for 3 years until you generated enough for an angel or VC to take a look? What exactly did you do and what was the timeline?

[akula]

Hi guys,

Thanks for your assistence here. One more question for everyone, especially the experienced people out there, like akula and jasaunder...
What was your own financing path and history?

For example, did you start with 10K of savings, 30K of loans and work up for 3 years until you generated enough for an angel or VC to take a look? What exactly did you do and what was the timeline?

well...depends which venture you're talking about..i was a cofounder for a thing called studentface...which was an australian version of facebook...the company was started with about 20k in savings, about 5k in consumer debt, and about 1.2m in angel equity...triggered in 100k tranches....this whole thing happened over 18 months or so

..the whole affair still ended up a complete mess though, because at one point, the angels got nervous, pulled funding and killed the company

as you can tell, for this, and other reasons, I'm not a raving advocate for equity finance...and I can tell you that when I was working in venture capital, the scenario above was just an every day thing...in fact, often, things were even worse

[jasaunders]

In my first major company, we were funded by our savings, a small LOC from a bank, and most of our money was from customer financing. We had long-term contractual agreements with a couple companies that invested heavily in us due to the benefit they would see if our company was successful. The largest investor in our company was Anhauser-Busch, although it wasn't an equity stake.

More recently I have depended more heavily on commercial financing. Even in this credit crisis, the banks I work with continue to increase the credit line for my company and provide significant financing.

I have never closed on angel or vc financing, although I have significant experience through many mediums: consulting with the Coleman Entrepreneurship Center, MBA classes in entrepreneurship and private equity, I am a frequent attendant at entrepreneurship events throughout the Chicago area including "Meet the Angels" events and panel discussions with angel groups and VC firms, regularly attend CEO breakfast series at the Sears Tower's Metropolitan Club, and in general am heavily involved in the startup scene in the region.

[cyman]

Hi guys,

Thanks, that's very useful information. Anyone else, please feel free to add.
I really need *details* to find the best way of getting to where I'm going.

To be fair in sharing..
My financing story:
Started it as a project of sorts at the end of high school. Had about $3000 in savings from being a camp counselor, plus a $3000 grant for student businesses from the Canadian government. Had to take on a few website consulting contracts to keep things afloat. By month 12, the business was paying for itself and most marketing, but in retrospect I was lucky to have movement that quickly given my resources.

Then, during university... There was a little consumer-grade financing. It took somewhat of a back seat but it gave the business time to grow. I graduated debt-free.

Since then, I've relied on commercial loans and consumer-grade credit. I pounced on a 20K sub-prime loan for small businesses offered by my bank. I also took a 15K loan to buy new equipment from a family member, but pay them back over 3 yrs. at a healthy 8%.

I recently got a small investment, really not much, $10K for a small equity stake, in order to help make ends meet on a big exclusive contract for co-marketing with a strong Canadian brand. This is for a new B2C side of my business. There are other potential investors who are still knocking. About up to $100K, but I found that by the time investors get their act together, I had already got the signed exclusive contract, some business from it, and there wasn't much risk left.

So, I want to see if they'll pump funding into my other business instead. And in the mean time, I'm getting a little impatient waiting for revenues to build.

Other Ways I Save Money
I rely heavily on things like student internship programs I create and using free coop programs for my tier 1 support staff. I find talented students/graduates who lack experience and provide 1 year of great experience as well as introduction to all my contacts. All people who worked with me in these get great jobs thereafter and it keeps costs low without outsourcing.
My office is near the university, so I have easy access to low-cost, highly skilled labour and that's kept my bottom line exceptionally low.