startup-costs, financing, valuationWe are two founders, who are on the verge of releasing a software product. We’ve got interest (but no orders) from a few well known companies in the sector we are targeting. We’re looking to raise capital shortly as we’ve been working on this project for 3-4 months full time, without income.
My question is how do I value our time and effort and answer what most investors will most likely ask - “what have you invested in your company?”. How do I quantify it. The product is virtually built, so we’ve avoided the huge upfront costs which some one without any software building skills would have to incur. How do I represent this in my business plan/ financial projections?
Any help would be much appreciated.
Investors are as much interested in the sweat and tears as they are in the cash that you invested.
Put a price on the hardware/material and expenses you incurred (office space, even if you worked at home), any travel, training courses, third party products or other help you got from other people.
Give a rough calculation on how much you earned during the previous three years up until, but excluding when you started on the project. Divide by three. It will give you a rough idea on how much you earn per year, your lifestyle.
Investors won’t want to make you rich - they want you to make them rich (and yourself) via a successful product so they’ll be open to investing so long as the money is going to help you support the business. Supporting the business also includes supporting the employees (the two of you). Don’t give them reason to think their investment will pay for a new sports car. You are entitled to some comforts so don’t think you have to place your self on a low income. Just be fair - the money is not free - respect it.
The less money you need, the more of the investors money can go on growing the business or improving the product.
And… the less money you and your mate need to live also implies the less money you need from an investor which also implies they should be asking for a smaller share holding.
I hope that makes sense…
Best of luck!
TL; DR: Investors don’t care about any of the things you are asking about.
They don’t care about the value of your time or how much time you have spent or how much money you have invested building your product because:
They also don’t care about your business plans or financial projections because everyone knows that is all meaningless. When you talk numbers you should focus on market size and market share of existing competitors in your space. In other words… facts. Not numbers pulled from thin air (and, therefore, guaranteed to be bogus) like sales projections.
Here’s what investors want.
Angels and other early stage investors want a “10X” return (meaning $10 out for every dollar invested) in a four to five year time horizon. They know most companies will fail and are willing to take that risk in exchange for being invested in the 1% of startups that are home runs.
They want to know what your product is. See a working prototype. Know they have your commitment as a sweat equity partner. They also want to have some feel for the space you are in, it’s growth potential, your competition and your strategy for differentiating your product from the field and earning market share. That’s pretty much it.
If they like everything they see and you are a credible partner, they want to invest their money in something other than your salary and the benchmark for your company valuation should be about $3 million pre-money. (If you don’t already know, you will need to lookup what a pre-money valuation is). That’s where the market is right now for early stage tech startups entering their first rounds of financing.
All content is licensed under CC BY-SA 3.0.