Almost every founder encounters the same dilemma: when your startup has no track record and no revenue to convince funders that it’s worth their time, how much money should you ask for?
You may think that shooting high will make your company seem more valuable, or that lowballing it will attract investors because you’re not asking for much. But either scenario could make potential funders cautious about opening their wallets.
If you’re already sitting at the table with potential investors, you have a shot. Here’s some advice about how to secure the financing you’re looking for.
How much is your company worth?
You help set your company’s valuation by the amount of money you ask from an investor. In any given round of fundraising, investors are looking for roughly 15 to 30 percent of the company, says Alban Denoyel, co-founder of Sketchfab, a platform that simplifies sharing 3D files.
If you’re asking an investor for $1 million, your company’s valuation is roughly between $3 million and $5 million. This is because an investor believes his or her $1 million investment will contribute anywhere between 15 and 30 percent of the company’s equity.
“By asking for a certain amount of money, you’re locked into this percentage of your company,” says venture capitalist Charlie O’Donnell, founder of Brooklyn Bridge Ventures. “So that means the math is giving you the valuation number.”
If more than one funder is interested, that affects the price you can ask.
“It’s supply and demand,” O’Donnell says. “If a lot of people want to get into your round, your price goes up. If not a lot of people get into your round, price goes down.”
Don’t undersell yourself
Let’s say you have a positive cash flow and low overhead, so you’re not looking to raise that much money.
O’Donnell cautions against knocking on the doors of big-time investors and saying, “We only need $50,000.” That signals to them that your idea isn’t worth their time. You’re not keeping them interested or engaged. Rather, you should be able to say to your investors that your idea is a huge deal, that you quit your hedge fund job for it, and that it will take hours to go through the pitch deck because your plan is so detailed.
Sometimes your company doesn’t require a big round of fundraising. And yet, you’re getting rejected from investors who don’t think you’re asking for enough. Check to see that you’re talking to the right investors.
“What’s important is to get the right investors, not the one putting the most money at the best price,” Denoyel says.
Be honest about why you’re asking for a small amount, whether it’s because you want to keep more equity in your company or you’re confident about your ability to raise more money in the future.
“If you are anything but straightforward and direct and honest about what’s important to you, VCs will see right through you,” says O’Donnell. “So you’re better off laying all the cards out on the table.”
Overselling yourself is just as bad
On the other hand, if your pitch deck is sloppy, disorganized, or difficult to follow, you’re better off not wasting the investor’s time. Don’t try to bluff your way through the process by comparing yourself to more established companies.
“Make sure the comparison is valid,” says Stever Robbins, a serial entrepreneur and executive coach in Cambridge, Massachusetts. “You can’t just say, ‘I’m a search engine, so I’ll be worth as much as Google.’ Admit you’re not going to be comparable to that and then scale down.”
At the end of the day, investors aren’t going to fall for smoke and mirrors.
“Very few businesses in the world are billion dollar businesses,” he says. “If you’re honest about it, you may get a lower valuation than you hoped for. You as the entrepreneur have to either found a great business or be okay taking home less money.”