What do Investors Expect?

[Luxe Studios]

Hello,

My business partner and I are starting a new hosting compnay, and we have a friend/client that wants to invest in the company. We estimated that first year costs would be around $ 30 000.00 and he is willing to put that money in.

I just wanted to know if anyone else has had experiences with investors, and what the outcome was. I know that Venture Capital Firms expect to triple their original investment (in profit back) in a few years, but what do private investors expect back?

Basically we are going to set this up so that the company is incorporated with 3 shareholders, my business partner and I, and our investor.

We are meeting with him next week to discuss this matter further, but I just wanted to see what you all though about this.

Thank you for your help.

[akula]

hallelujah, at last, a real question!

[Luxe Studios]

Hi Akula

I also wanted to mention, that out of that 30 000.00 $1000/mth is going to salary, it's just something small to kinda cover transportation costs to the office and other things.

So do investors cover all costs? This money is going to essentially cover all our 1st year expenses. We are not planning on seeking any other type of funding (i.e. bank loans).

Also are profits split at the end of the year or monthly?

thx.

[akula]

I just wanted to know if anyone else has had experiences with investors, and what the outcome was. I know that Venture Capital Firms expect to triple their original investment (in profit back) in a few years, but what do private investors expect back?

Yes, I've had experience with investors; angels, vcs and LPs

OK...I'll try to cover the central issue and we can go from there.

First off, the outcome with all venture investments is always bad for the entrepreneur (with some sparse exceptions, which are usually the ones reported in the media). The whole point of venture investment is to get the entrepreneur to sacrifice their life, only to kick them out of the company and reap all the rewards. That's just how vc works....for a lot of no-so-obvious reasons (e.g. founders do not make good managers, they make good founders, that's why they're called founders)...Not to fear; there are ways to deal with this problem of asynchronous motivations.

Second, the expectations of angel investors are different in order of priority to vcs. The expected rate of return is the same (circa 30% p.a) but importance placed on qualitative outcomes has greater priority. Angels, foremost, want to leave a legacy, rather than vcs, who are gambling with other people's money, and have to be accountable to people other than their wives (or husbands). If you request, I can provide you with an independent report on the differnces between various financiers, so you can better tailor your pitch depending on the kind of financier you're pitching.

All in all, these facts can assist you in decision making.

Now.....me being nice: if you'd like to, I can can answer your further questions, and help you ask the right questions, to get the right answers, so you can make better decisions and keep your job as CEO.

Now, the unpleasant bit: from the facts you've given me (an angel pumping $30k into a concept stage, web hosting company, with no proof of an "all star" team), I can tell you that some thing's wrong; a) I do not have the full facts b) You're dealing with a flake c) You're dealing with dumb money, and you're about to get an allowance rather than an investment.

Private investors do not fund people's salaries, enter saturated markets without a competitive advantage, or invest in vapourware. The only rational funding scenario for a hosting company in 2006, is 7 figure expansion capital for an already profitable, medium sized company that needs risk capital to fund its expansion strategy. Anything outside of this scenario - is weird (to use a euphemism).

Finally; Me and you are talking about financing. Based on these facts, it's likely that the angel deal will fall through because it does not meet standard criteria for what makes a good private equity deal. If it does fall through, I invite you to ask something like "What are my financing options based on these facts", or, to lower the chances of the deal falling through, it's a good question to ask, "What are some things I can say to better meet investor expectations?" Hopefully, this will lead to the deal not falling through and I will cease to be of use to you.

In other words; I haven't fully answered your question. The complete answer to "what do private investors expect", is a four paragraph overview of things commonly called due diligence, complete with qualifications and exceptions.

How else may I (or may not) be of service?

[Luxe Studios]

Thank you for that, I think a bit of background info is in order... The investor is a client of Luxe Studios, of about 3 years, over this time we have formed a friendship, and have helped them out in a number of ways throughout the years free of charge.

It is necessary for us to start a hosting compnay so that we can have full control over hosting to ensure uptime, ect.

I realize that the market is quite saturated, and our major advantange over our compeitors is that we won't oversell.

So if I understood you correctly, our investor will own 30% of the company? With profit sharing at the end of the year..or.until forever? Always receiving 30% of profits? Does this mean that investors invest each year, or only once?

I have a few quesions based on what you said. If he owns only 30% how could i lose my position as CEO?

What do you mean by dumb money?

As for the "all star team" I have a business advisor (who is not available to chat today, and i had some pressing questions so i came here) who will be helping/advising me throughout this process. He has sucessfully grown 3 start-ups, and has a ton of business experience, from being a CEO and growing profits for a company from 5 mil to 15 mil, to starting his own company and dealing with investors himself. He's seen a lot of ups and downs in the business world, and just celebrated his 56th B-day a few days ago.

I realize this will be a long process, and I just wanted to get some things straight, I would like to read that independent report, if you can PM me.

Thank you

P.S. What happens if the company (for whatever reason) is not sucessful? Does the money invested have to be paid back like a loan with interest? Just curious, I haven't seen anything on that subject.

[bbalfour]

I agree with Akula on "investors don't fund salaries."

I have had multiple ventures that have had early stage funding from Angels. Not once have I taken a salary. That was my risk, his risk was the money. Especially when you say $1000/month, or $12,000 per year is going to salary and you expect $30,000 to cover expenses for a year. Thats almost 50% of his investment going to salary.

[Luxe Studios]

I agree with Akula on "investors don't fund salaries."

I have had multiple ventures that have had early stage funding from Angels. Not once have I taken a salary. That was my risk, his risk was the money. Especially when you say $1000/month, or $12,000 per year is going to salary and you expect $30,000 to cover expenses for a year. Thats almost 50% of his investment going to salary.

Thanks for your reply, I have had no previous experience with investors, but the salary idea was the investor's idea. I guess everyone does things a bit differently.

[Muddy]

I also do not believe if your only selling point is if you dont oversell. Have you dont any research into it?

[clax313]

Akula:

I wouldn't mind reading the report. Please PM me.

[akula]

Akula:

I wouldn't mind reading the report. Please PM me.

WHAT DO INVESTORS LOOK FOR IN A BUSINESS PLAN? A COMPARISON OF
BANKERS, VENTURE CAPITALISTS AND BUSINESS ANGELS

http://daniel.hotblog.com.au/images/...ankers_vcs.pdf (page 14)

Looks at how different kinds of investors place diffrent priority on similar investment evaluation criteria

Australia’s informal venture capitalists: an exploratory profile

http://daniel.hotblog.com.au/images/...ry_Profile.pdf (pages 10-11)

Explores the set of criteria angels use in evaluating investment opportunities, and other characteristics (i.e. where and how to find angels) Light reading, lots of charts, applies to all countries.


WHAT DRIVES MICRO-ANGEL INVESTMENTS?

http://www.tuta.hut.fi/units/Isib/pu...apital_sbe.pdf

Explores the real reasons for why angels invest money (behavioural reasons other than rates of return and due diligence). Particularly, draws conclusions for how to gain exposure to angels.

[akula]

Luxe, I will answer your questions as soon as I have a few minutes.

I'll take me like 45min-1hr to cover your issues and draw out to-do items which you can pursue to have a successful go at this venture.

Sorry for the inconvenience

[F360]

May I ask what the $30,000 will be spent on? Im guessing highend servers?

[Luxe Studios]

May I ask what the $30,000 will be spent on? Im guessing highend servers?

Ther server fees are under $200/mth and server managment at $50/mth. Office rent, and mostly start-up expenses, incorporating the company, having a lawyer read over the contracts, plus a few other things. We are starting small and will add servers as we need to. Right now we are leasing one server. The office will be used for Luxe Studios as well. Any web design clients will most likely turn into hosting clients for Luxe Hosting.

[Luxe Studios]

I also do not believe if your only selling point is if you dont oversell. Have you dont any research into it?

Yes, my business partner has researched the issue, and he is more technically inclined(I'm still learning all the details). We have had numerous experiences with horrible hosts that have put our entire business at risk. That is why we decided that we couldn't rely on anyone else, we had to do it on our own, to be able to have control over our hosting.

We will provide quality service. More and more people are realizing that getting hosting for 7$/mth or less is not worth it when your site continually crashes, you can't get any support, and you've been oversold and forced into a higher package before you even come close to approaching the alloted amount you paid for.

Here is a good forum if you want to know more about hosting, and current issues affecting the market: http://www.webhostingtalk.com/

[gacktech]

The best advice that I give you if this investor is a personal friend is to get a great accountant. I don't mean one who does just the basics but one who is willing to invest the time in your company and situation. There are ways of doing creative financing with your investor. It seems you are very lucky to have this friend as an investor. Does your friend want a say in your business decisions? If he does not, an accountant can set your company up so that you do not have to give him voting rights. I am not familiar with Canadian law, but in the US there are ways to set your investor up to get a percentage return on his money in x years, and you don't have to give up any percentage of your company. If this is a very close friend and he trusts you this is the route that I would follow. In the US, there are bridge loans where the investor can set up the money as a loan he makes x % on his money, but if your company does not become profitable in the given time frame then he can sue you for the company and he will own it. Also, is this person an accrediated investor? In the US this means making at least 300k a year and have a million dollars in assests. The laws are different for these two groups of people. Most countries have laws against gradma putting her life savings in a company it failing causing her to lose everything that she has ever worked for, so be careful about how you take money. Like I said hire a great accountant who can walk you through some creative financing options that can allow you to retain control of your company and make your investor happy.

gacktech