“The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.”- Warren Buffett
After taking the first step towards converting your dream into reality the first question comes to your mind is about, how to get funds? And many more strings of attached questions like how much money to ask for? How to ask someone to invest in your business? What is a fair percentage for an investor? What to offer investors?
So, after project planning when you are able to decide how much to ask for, your first instinct is probably to decide how much you need. But, should these amounts be at the same level? Rarely.
This blog will surely help you to answer this question, how much money to ask for from investors?
The simple answer to this question is the minimum amount that you need to make your plan work. In confusion, some entrepreneurs follow the wrong strategy of asking a huge amount in a hope that after negotiation they will get a small amount. While some of them are also sailing in the same boat but in a vice-versa direction, to get the foot in the door with an investor they understate their requirement.
Both the strategies are likely to destroy entrepreneur credibility with potential investors, even before they look at the plan. Some parameters are mentioned here that one should utilize while portraying the request and being able to justify it to the investor.
Important Tips on How Much Money to Ask for from Investors
- Consider implied ownership cost: If your company is at starting stage and for instance, its valuation is under $1M then don’t ask for a $3M investment. In this way, three times the investor would buy your company and that he doesn’t want it. In such a situation, a founder can validly ask for $200k-$300k and can offer a 20-30% stake of your company in exchange.
- Type of investor: Usually angel investment groups don’t consider a request over $1M, while VCs don’t look anything below $2M. Therefore, amounts of $100k or below, are usually consigned from friends and family. For funding requests, approaching any one of these groups outside their range is a waste of your and their time.
- Company stage: For instance, you only have an idea, but no financial valuation. In such a case, investment request size can be on goodwill based that you have with your relatives and other business track record. In such an early stage Angels might be interested, but VCs definitely won’t consider until you have the product, customer base, and revenue plans.
- Calculate what you need, and add a buffer: Study your financial model including volume, cost, and pricing parameters. Understand your cash flow bottoms out and if it’s at minus $400k then add a 25% buffer for funding requests. The size of the request must match your financials to be credible.
- Investment terms: This is about equity investment and the credibility of its request size. Terms like valuation tied to later rounds, warrants, anti-dilution clauses, warrants, preferred versus common stock and bridge loan options as restrictive terms decrease the credible investment amount.
- Fund Utilization: Investors are interested to see a “use of funds” list. Further, they expect their funds are only invested in the core mission. Thus, don’t tell investors that you intend to purchase executive cars or fancy offices or any such unnecessary luxury stuff at this stage.
Determining the appropriate size of your investment request is the most critical factor for investors in deciding to invest or not to invest in your company. In the first time you require to get it defensibly right; if you change your request under pressure then definitely lose your credibility.
Before asking for investment from an investor do your homework!