Traction · Fundraising

How much equity should be offered against traction money?

Sheetal Bansal

June 30th, 2016



I am in talks with investors for an initial traction for my startup venture into online book rental service. Please advise what should be an ideal ratio between investment & equity. Most of the investors which I met are seeking huge equity percentage in return of less than INR 1 million investment with a Co-founder tag as well.

Also, would like to understand, when is the ideal time to go for seed funding from VC or Angel Investors.

All help would be appreciated.

Thanks.
Sheetal
As a founder, you’re always in fundraising mode (whether active or passive). In this course, we’ll teach you how to successfully raise follow-on capital, establish a valuation for your company, build an investor pipeline for your next round, and more...

Martin Omansky Independent Venture Capital & Private Equity Professional

June 30th, 2016

We sometimes invest in very early stage deals. We do so mostly when the project needs very large amounts of cash - such as projects in the life sciences. For smaller deals like yours, I would not approach investor/strangers. Their requirements are usually confiscatory - although understandable from a financial and risk perspective. Best to bootstrap, use your own funds, get funds from co-founders, raise capital from friends and family, etc. One more thing - which is not particularly encouraging to founders - people need their own resources to go into business! We advise that founders have at least 2 years worth of salary in reserve before starting an enterprise - and 20% of the money necessary to launch the business. We see too many people who have a business idea but no personal means to execute even preliminary plans. There are ways and means to get a good idea into general use, but founding a start-up without sufficient finances is not one of them. Sent from my iPhone

Sheetal Bansal

June 30th, 2016

Thank you for the response members. 
I'd like to add in here that we are not desperate in getting traction as it would not pose a materialistic impact on the operations or getting the ops kicked off. 
The key reason of seeking traction is to engage a potential investor who could invest commercially & engage personally to guide & mentor at the same time.

There is already a plan B in place, in case traction is not available by July 15th which would be proceed on self funds. Though the launch might not be that huge as it could be through traction, but still it would be enough to create presence

Reading your views, it appears, it doesn't make much sense to go for traction in the initial stage. Kicking off business self funded & generating promising revenues & visibility would place the venture in a more confident place while pitching for seed funding.

Martin Omansky Independent Venture Capital & Private Equity Professional

June 30th, 2016

True enough. Also be aware that most of the Shark Tank deals don't have strong IP, and valuations are unrealistically high, in our opinion. Underscore Chicke's point: investment by strangers in pre-revenue companies is either very difficult, very expensive, or both. Please do not go into this project, however excited you are about its prospects, unless you can do so financially. Passion alone for the subject matter is insufficient; it takes resources and a knowledgable team to execute the plan effectively. Last point: we are working on two projects that have benefited by delaying our financing until they got on firmer financial ground. We are more comfortable with the risks involved, and they can justify a better equity deal. Sent from my iPhone

Chicke Fitzgerald

June 30th, 2016

Smart answer Sheetal.  I don't know if you have the show Shark Tank in the UK, but if you can watch it online, you will see that self-funding through revenue generation and break even (even if without a salary to you or other co-founders) will always be better than trying to fund pre-revenue.

Christoph Ranaweera validate early, pivot and kill fast

June 30th, 2016

It depends what value of your company you can sell. If you can convince people that your company is worth 1 million USD then you get 200k for 20% or something like that. 
So check your numbers, check your market, be good in selling.
Or course investors will try to get a better deal but responsible investors know that the founders need to keep a significant state after seed round, definitely more than half.
see as well here (this is a german company builder), just click on equity story towards the end of the page: http://www.rheingau-founders.com/working-with-us/
this all differs much depending on country and business but gives you an indication.

when to start seed round.
You made pre evaluation, interviewed potential customers and did some landingpage tests or similar things to get an idea that your business actually has good chance to get traction, then get seed to build a prototype with all these arguments why this investment is the best thing they can go for.

Chicke Fitzgerald

June 30th, 2016

This is so true Martin.    

I do have to say Sheetal that I love the term "traction money".  I think there is a space for a new virtual incubator structure that is a hybrid from the traditional investment, where they bring resources to the table versus (or in addition to) cash.  But you still need to know what you need and why and you need to prioritize how you would spend the money if you had it.     

In cities with proper incubators, entrepreneurs have a choice for this kind of environment, but for those outside those areas, it is harder to get traction from "idea to implementation" and as Martin says, you have to be able to weather the timeframe in between, both with funds to live and pay bills and funds to get the idea built.

A very smart investor once said to me "what will you use the money for?"  He then went on to say, what if I could get you the resources to do those things instead of getting you the money?  I agreed that was every bit as useful as a cash infusion.   

So many believe that money solves all problems, but if you don't know what you would spend it on and why, you are just as likely to fail even with funding.

Sheetal, I would focus on being very clear about what you need to accomplish and how much time and what caliber resource you need to get each task done. Look around you and see if you know people with those skills that could help. 

This is every bit as valuable as finding friends and family money.  Don't limit your search to those that want to join you in your venture.  There are people along the way that will help just because they want you to succeed.  Find them.

It takes a village to build a company™.  http://www.thegamechanger.network


Sheetal Bansal

June 30th, 2016

@ Chicke

I am based out of India. I'll surely watch the show online.

Thanks

Sidney Sclar SID the SECURITY PRO at sidthesecuritypro.com

June 30th, 2016

What an Investor wants and what they get is partially dependent on the future anticipated value of the organization. Sometimes I would rather have a good option then value today