What do I as an investor have to believe…
So I was sitting in on a pitch that became way to technical (read boring) and I found myself wondering, “What do I have to believe to make an investment in this company pay off?” With some fuzzy math I determined that they would need to generate $10 million in revenue with a respectable EBIT.
How did I get there? That is the part that start-ups need to include in their pitch. In this case the company was seeking $750,000 for a 34% stake in the company (step 1). Wait a minute the company expects to raise more money in the fall. My investment is going to get crammed down. How much do they intend to raise and what to they plan to give for it? In this case the company expected to raise an amount that would have cut my 34% down to 16% and then expected no additional funding needs until a liquidity event (step 2). This information is what is needed and I call it a “Capital Plan” the pros may call it something else. You have to have a Capital Plan if you want to raise money. – Funny I never hear anyone explicity state their Capital Plan.
Having heard that I was going to get squeezed down and guessing at the Revenue Multiple (note I know that most company’s do not sell at revenue multiples but I will keep it simple), I arrived at the target that the company will need $10 million in revenue (step 3). This helped me develop a key assumption and assess whether I believed the story. Given their product price point and the size of the market, I decided it was too high and took a pass.
If you are pitching a company this logic path of what does an investor have to believe to get a return is a key part of your pitch so don’t forget it.
Tags: capital plan, valuation