A Start-Up Entrepreneur's Desire -Investor Funding

A common desire of most entrepreneurs starting up a new business - how to find investors willing to contribute the vital financial resources.

Valuing an Existing Business

It would be a much easier task if you were already established with cashflows, balance sheets, clients and the resultant projections. Typically, 3 years of profitable history tells a pattern that the investor will be eager to see and extrapolate to determine the future prospects. The most basic valuation for a company would be to multiply the earnings (profit after tax) by a multiple known as Profit / Earnings Ratio (PE ratio). PE ratios can be easily found for each company listed on a stock exchange. These usually vary between 5 and 20.

As an example, a company with earnings of $1m and a PE ratio of 7 would be valued at $7m.

If there are 3,500 shares on issue (the shareholders own the company), then each share has a value of $2,000 (ie $7m divided by 3,500 shares = $2,000).

Valuing a Start Up Business

Of course many people want great returns on investment (ROI) with little or no risk.

Unfortunately, a start-up carries great risk and it is difficult to show investors any history whatsoever.

Before the Internet boom of 2000, investors were throwing money at any Internet start-up. Before the global fionancial crisis (GFC) of 2008, investors were throwing money at any start-up with a good story. At these times, the sentiment was strong and confident. Yet the market is now quite cautious and risk-averse.

This doesn't bode well for start-ups, yet there are some things you can do to encourage investors:

1. Bet your house on it - if you have nothing to lose, then investors won't risk their assets either
2. Hit your FFF first - if "friends, family and fools" that know you won't invest, strangers won't either
3. Have a great team - you need to fill a "skills matrix" to succeed; a mix of grey hair experience and youthful enthusiasm
4. Local jurisdiction - if you're not incorporated and located locally, they can't easily take action; they need security
5. A business, not a job - don't expect investors to fund your wages in a business relying on an individual; they invest in systems, not people
6. Explain Use of Funds - you need to justify the amount you seek - not just pluck a number.
7. Proof of Concept - an idea is worth nothing; implement it to prove you can. Investors want to experience your business before they'll invest.

If you can tick off all these criteria, it will be easier to attract investors. But since you are a start up, you will need to ask for investor funds in stages. The first stage to get your first key milestone will be for shares at a certain heavily discounted amount - rewarding risk with a better price for more shares. Then, since you will have progressed and risk is reduced, you then can offer the next stage for a greater price, etc. This way, you can guage what investors are willing to pay and you don't ask for too much or too little through guesses.

This all requires a fair bit of maths and research. If you can get the 7 criteria sorted and the first stage of investors, then you will need to talk to someone who can go through the complexities and legalities (vital to get right) with you to conjure a share structure and capital raising plan that will be of practical help for the full capital raising.