I am aware there is no rule per se, but there has to be some connection somehow between what I am asking, how much equity I am giving and what are my revenue projections for 5 years. For instance if I am asking for 500k / 15% equity, investors wouldn't be expecting me to generate the same level of revenue than someone who is asking for 5M / 15%. Any hint/explanation would be very much appreciated!
EDIT - I can't seem to comment on the comments... It is not about tweaking the revenue projection! please don't put words in my mouth. I am just checking the feedback we got from an investor whereby the revenue projection were not looking sexy enough. We will not change those figures unless we have good and appropriate reasons to do so.
This is a wrong-headed approach from the get go. Your revenue projection should be the best you can do to accurately depict the plan you have in the context of the market, your capacity to address it, etc. Once you have a realistic revenue projection with a sound basis, you can start to look at pricing a round, assuming that is the basis of the pricing strategy. One of the most common approaches to pricing a round is called the venture method. It starts with exits and reduces the value by expected returns with time and likelihood of success to generate a present value. Going from pricing of a round to revenue projections is typically disingenuous, and in due diligence will be detected - potentially as either an indication of fraud or incompetence. I strongly advise not to take this approach.
In addition to other comments that say it is wrong to think like this I would like to add the following. I believe it is good practise to think upfront if your valuation makes some sense. I know, any plan will be useless the minute you start but thinking about valuation will at least forces you to go over the numbers. It might happen that you are unable to find any justifaction for any investment. As for the valuation itself, it really depends on the market and what they are willing to pay. The more investors, the deeper their pockets and the more sexy the subject is the higher will be the valuation.
Investors will be looking at a 10x return since they figure that at seed level investments 9 out of 10 startups will default. So in two to three years you should have a valuation of 10 times the seed investment you are looking for
It is not about the projections - they should be realistic - you should not be tailoring them to the ask- you should be focusing on the process to reach numbers, key milestones, how do you acquire the first customer, and then the second , what does that mean to your business model, how do you scale from there - then you can create revenue projections, but otherwise they will be wild ass guesses that will force you into a defensive posture ... - One way that you can address the funding and valuation issue is to receive funding via reaching milestones .. you may not receive all of the money up front but you will be able to reacive it as you reduce risk, show progress and increase value -
I am going to be technical. Take a look at your financial Risk using a metric--EBITDA/%Sales(Revenue)=.
The rule of thumb is
Should not be more than 2X.Most companies go bankrupt if the threshold is abused. Investors study this metric to make decisions.
Now the size of equity funding will be predicated the volume of your equity capital contribution.
I am adding some thoughts here to confirm others comments and to assure that projection will remain projection as long you don't have the capability to achieve them. It all boils down to the aggressiveness of your investors to break into your market size. Humble investors who want to play it safe will ask for a decent return - not x's of course. But when it comes to a more risky investor, they have a whole wider different appetite to dominate and control.
All these thought have in mind of course a workable business model with scalability as an extra plus thing to it