Are you financially sophisticated?

What do crowd-funding factoring, carbon fiber guitars, and designer seeds all have in common? No, this is not the start of a goofy joke – they are all companies who closed funding rounds this summer: P2Bi, Viktorian Guitars, and Evolutionary Genomics.

We’ve seen 12 companies secure angel funding so far this year and we’ve started to notice a pattern. Companies who are able to seal the deal with investors are generally more sophisticated than those who are still waiting. Is that a big shocker? Probably not, but how can your start-up get on the path to financial sophistication quickly? Here’s three points to consider:

 

  1. Plan a financial structure that is friendly to early investors – If you are raising a seed round of $500k now, and will still need to seek significant follow-on funding, your initial investors run the risk of getting diluted. Dilution renders their investment much less valuable than it was initially. Many RVC Investor Forum Angels have had this experience; it’s unpleasant and off-putting. Sometimes it’s enough to cause an Angel to hang up their investor shoes for a while. Do your best to keep your initial backers’ investments strong and let them know that dilution is just as much your concern as theirs.
  2. Term sheet – Have the term sheet structured ahead of time. Many investors might be interested enough to participate in your deal, but few are willing to put in the time to help you structure your deal. Make the job of your lead investor easy by having all of your legwork done ahead of time. What if you don’t have the first clue about a term sheet? Start with a tool like the WSGR Term Sheet Generator. Really do your homework and aim to understand the term sheet that pops out of the generator. Next steps, tweek, change, modify, and improve it!
  3. Valuation – Really think hard about this. There are many schools of thought about what gets factored into a valuation. David Fein from ValuSource will be discussing this topic at the Colorado Capital Conference. Do you have a product on the market? Revenues? A Patent? Or is your valuation based solely on the three years of backbreaking 90hr weeks you’ve put into the business. Here’s a good rule of thumb. If you can grow organically and will be able to continue momentum without outside investment, then go ahead and keep that valuation high. But if your venture requires outside investment to survive and grow, then lower that valuation and sweeten the deal. We’ve seen a few valuations drop from $4M+ to little over $1M. Sometimes, that’s what it takes to get the job done!
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