If you want to get easy access to funds for your business you will have to make sure that you are prepared from all aspects and have all the legal, financial and other documents ready. You must make sure that all facets of the funding process is well covered and there will be no delays due to nay process that may be left untouched and any issues left unaddressed.
The valuation of your company is the most significant aspect when you want to obtain funding for your business from a bank, any other line of credit, NBFCs or even from a venture capitalist. The valuation of a company or a business is a very critical issue for both the entrepreneur and the investor.
Ideally, the valuation of a business is typically referred to as “pre-money valuation.” This means it is the value of the business agreed upon before there is any new money or capital invested in it. For example, if the pre-money valuation of your business is supposed to be $15 million and the investors decide to invest $5 million in a financing in it then it means the “post-money” valuation of your company will be $20 million. In such a situation the investors will expect to receive a 5/20or 25%of the company at the closing of the financing.
Valuation is negotiable
Valuation of a business has got a few characteristic features and attributes such as:
- There is no definite formula or a methodology for evaluating the worth of a business
- It is primarily for this reason that such valuation is negotiable
- Typically, higher the valuation of your company is the less will be the dilution you will encounter.
From the VC’s perspective lower valuation means higher investor stake and more upside potential of the investment in the company. This will minimize the risk and therefore it will create a higher motivation for the investor to assist your company.
The key factors
There are a few key factors that are considered while determining the value of your company and these factors include:
- The experience of the founders
- Past success records of the founders
- Whether it is a business of a “serial” entrepreneur as that will typically present less riskand will therefore command higher valuations
- The quantum of the market opportunity
- The proprietary technology that may be developed by the company already
- Any preliminary traction by the company such as revenue, satisfied customers, partnerships, favorable publicity and others
- Progress towards a triflingly viable product
- The recurrent revenue opportunity of your business model
- The capital efficiency of that business model to reach significant profitability
- Valuations of other comparable companies
- Whether or not the company is “hot” and
- Whether or not it is being pursued by other investors.
Apart from the above list of factors, the current economic climate will also be considered while valuation. This is an important factor because valuations will usually climb up when the overall economy is very strong and prospective and will be far lower during any economic slumps.
Each startup as well as the valuation analysis is unique. The stage rounds are also considered to determine the range of valuations. Ideally for a very early-stage round which is commonly referred to as “seed” financing, the range will lie often between $1 million and $5 million. On the other hand if your business have gotten some traction and is doing a “Series A” round then typically the range of valuation of your company will be between $5 million and $15 million.
Know the forms of business funding
Now that you know your business value you may now seek funding for it. However, for this you will need to know the different forms and sources from where you can have your business financed. The sources to consider are:
- Bank loan: You may opt for a bank loan straightaway. Lots of banks offer loans to startups for operating capital and even to established businesses for long-term growth. You may also apply for business loan to other non-banking financial institutions such as Liberty Lending as well. However, to secure this loan you will need to provide adequate financial information of your business and other personal documents as well. You may have to give collateral to secure and guarantee a loan.
- Venture capital: If yours is a fast growing company you may also try venture capital funds for hyper growth and to enter into new markets, expand your sales or even add new products. You will need tens of thousands of dollar for this and VCs are ideal resource as that has lots of money to deploy. They will conduct their due diligence and ascertain the viability of your business and investment. The ultimate goal in this is to sell your business to reap a financial return for the limited investment partners as well as the entrepreneur.
- Friends and family: If you do not have enough savings or a strong credit score to obtain a loan you can even turn towards your friends and family for funds to meet the growing needs of your business. Depending on their ability and the quantum of your need you may get enough financial help with no or less strings attached.
- Crowdfunding: You may also opt for crowd funding under the JOBS Act which will allow you to get funds from a wider pool of small investors with fewer restrictions. This is best source if you do not qualify for a bank loan or may not be ready for angel or venture capital funding
- Angel investors: You may also look for sophisticated “angel” investors for funding. They are affluent individuals and often help business startup in exchange for ownership equity or convertible debt.
Though all sources are useful and effective, all has its pros and cons as well. You must know these as well as the fact that it all depends on your business needs, the funding volume required, your ability and lastly but not less importantly on your choice and preference.