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Crowdfunding Frameworks After initial interest, how to ask investors for money?

posted Nov 4, 2013, 10:19 AM by Unknown user   [ updated Nov 4, 2013, 10:24 AM ]

Attention from investors is the first thing. We discussed that in our previous post. If you have a good start up idea and follow some guidelines, there is a high chance to get noticed. Afterwards, there comes a time in the fundraising process when you have to face investors and discuss your valuation. As any important point, it should be discussed very early to avoid wasting time in negotiating a deal that is broken from the beginning. As it turns out, valuation is often left as almost the last point to be addressed, causing the failure of the deal and the waste of the time invested in the process.

The reason for not discussing it is that, if there is initial attention, valuation is one of the few points in which the two parties, entrepreneur and investor, have conflicting interests.

Indeed, if the pitch grasps investors’ attention, the discussions about strategy, team and the other parts of the business are more likely going to be friendly. The investors want to know that the company they are analyzing has good prospects, and when it does, they would not risk losing the deal for some silly strategy or budgeting disagreements.

However, when it comes to the price of the deal (i.e. the valuation), the two parties involved in the negotiation are naturally ‘against’ each other. A higher valuation means a larger share to the entrepreneur and the previous investors. While a lower one benefits the new investors to the detriment of the other parties.

This is the main reason to be prepared in this regard. You need to ask for money having a reasonable price and a reasonable quantity. That is to say that you need to have an estimate of the capital need that is coherent with your expansion strategy.  You also have to ask for a valuation that is coherent with market averages for comparable companies. Of course, there is no need for an estimate that is down to the third decimal digit, a range is usually enough, there is going to be time to negotiate it afterwards anyway.

If you attracted investors’ attention on your business idea and you carefully considered price and quantity, you can be confident in communicating the investment proposal to investors. Of course, they will negotiate and try to drive your estimate down- it’s their job (and they are good at it). Having said that, a well thought proposal will increase your chances to turn the discussion in your favor!

Side note: if you are skeptical about your bargaining power and you fear “your company is worth what the market will pay for it”, create a market for your startup, and you will have the leverage to get the full value you feel it is worth.

To find out what is a reasonable estimate and more, stay tuned for the next articles!

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