Raising Capital? Know Your Investor’s Financial Metrics

I have been assisting a company raise capital and we have been exploring Angel Investment networks. I have found that investors use the following metrics to pre-screen (from a financial perspective) your company:

1. Capital sought
2. Equity stake
3. Pre-Money valuation
4. Exit

1. Capital Sought

This is fairly straight forward, this is the total amount of capital you are looking for. For our example, let’s assume $15 million.

2. Equity stake

How much are the original investors and founders willing to give up in return to securing the capital? Some investors may want control (ie. greater than 50%) – although this is rare. Let’s assume, our company will sell 30% share for $15 million.

3. Pre-money valuation

This is the valuation of your company before the capital flows into the company. It is important to define this with the potential investor, as some may assume post-money valuation, which affects the way the equity stake is calculated. A great introduction to pre-money vs post-money valuation can be found at Investopedia. Valuing a company is a difficult process (especially for startups) but not impossible – working closely with a reputable 3rd party finance company will help convince investors of your valuation.

Let’s assume our company’s pre-money valuation is $20 million. So our valuation after investment will be $45 million ($20 million pre-money valuation + $15 million capital)

4. Exit

You will need to know the how, when and the target valuation of your exit strategy. An exit for an investor can mean different things over different timeframes. An investor may want to have their shares “liquid” on a stock exchange to moneytise all or part of their investments. Some will want a quick turnaround, some want to wait years to build up the value of the company and cash in. Some have different levels of the expected return on investment. The point of this is to provide a forecast of the valuation of the company at the time you decide to exit. In our example, we forecast that our company will be worth $211 million after 7 years.

(For simplicity, I have left out discount rates for the Return on Investment calculations)

So, the investor can now make a “quick call” on whether to take the discussion further. Obviously, there are other considerations that an investor will look at (management team, market potential etc.) but it is nevertheless important to have these figures at your fingertips.

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