What is a good % return (3 yr pay back) on a 25k early stage investment for seed round participants?

Howard Glase Managing Partner

August 17th, 2016

Early stage pharma start up with 2 products at launch. Will see profit in year 2 and be able to pay back initial investment of $25,000 plus "Interest" at year three. 

What is an attractive ROI for this type of investment ? 

My model was payback at year 3 with 12.68% interest (in one payment) and offer 1 % of common shares. 4 year profit EBITA is forecasted at $7 million. 

Would love to hear input and attractive models .....?

Annette Tonti Founder, President at The Start Exchange

August 17th, 2016

Curious what happens at term if you cannot pay back the $25K + interest? Is the interest compounded annually?  Will you be raising more money between now and the 3 years when the term is up?

Howard Glase Managing Partner

August 18th, 2016

Yes India/China are viable sources; but for in licensing a product a FDA or NICE Drug Dossier and approved manufacturing facility with no infractions provides allot of confidence. 

Thanks, hg

Bob Graham Engineering and Software

August 18th, 2016

Can you go get a pre-sale for one product? 
Forecasted sales almost never come to fruition. 
Get any pre-sale and you've got something.

Or, why not raise a standard angel round on the deal? Sell the vision. I don't think angels will care about your forecast at all. They'll just care about your team, background and potential for the company (IE can it make $50MM+ and are you the guy to do it).

I'd stay away from loans with a startup unless you have the sales to pay off the interest and a very real roadmap of how to get more money.

Im not an expert but I feel you are placing too much faith in the forecasts. 
Who cares about the forecasts anyways, go sell the vision :)

Manish Koshal Prop. of Second International

August 17th, 2016

I have an idea for you. Manufacturing pharmaceuticals is very cost effective, in India. I could handle it for you and export to where you require. Let us work on this one, seriously. -- Manish Koshal, Second International, B-5/4483, Vasant Kunj, New Delhi-110070, India. Tele No.: +91 11 26122668 Fax No.: +91 11 26898692 Mobile #: +91 9811153104 E. Mail: Skype: manish.koshal

Joseph Wang Chief Science Officer at Bitquant Research Laboratories

August 20th, 2016

I think you are asking the wrong question.

If you are not out of business in three years, then you are going to be really lucky.  Investors invest in seed stage companies with the knowledge that many if not most of them will go belly up in three years.

What people are interested in is what the possible upside is.  Suppose everything goes according to plan, and you hit the jackpot.  Does your offering have enough potential upside so that the investor can recover the losses from the lemons that they've invested in.  Also is there anything that limited the potential downside.

Also projections are looked at extremely skeptically by investors.  Things *NEVER* go according to plan, and investors have so many plans that promise huge profits in year 3, that no one believes those projections.

What people are more interested in are contingencies.  What happens under scenarios A, B, and C.  Also planning is important to make sure that you aren't building half a bridge.

Howard Glase Managing Partner

August 17th, 2016

Well --- I failed in the details. We have the self financed the two in license products to registration. I have a target seed round raise of $350k ( @ $25 k per person or multiples). Equity for final market approval --- once products are on market, we will raise $1 million institutional funds to build out further.

4 sales forecasted at $17 million, net profit at $6m. 

I learning that a interest rate of 20 to 25 % is more inline on the money. 

thx's Bob for your insights, Annette - yes we will have revenue and will raise more funds, Irwin ---apologies on the lack of details and being skeptical is a great foundation for due diligence....I have allot of interested investors, not seeking investors ---just good advice for fair ROI 

Manish Koshal Prop. of Second International

August 19th, 2016

We would get all approvals for the manufacturing facility, so, you don't have to worry about it.

Bob Graham Engineering and Software

August 17th, 2016

I'm not an investor but just curious more than anything... How do you know it will see profit in year 2 and $7MM forecasted? Are there existing sales?

This strikes me as a non-standard arrangement. Im mostly just curious and that's why Im posting here. I am by no means an expert. 

It seems like you'd want a lot more than 12.68% interest on a high risk investment like a startup. 

I know most angels need to fund 10-20 startups knowing all but 1 or 2 will fail, so it seems if they have to fund say 20 at $25K, then you should be able to show them you can make them at least $500K in 2 to 3 years. If you do $7MM, then I guess 7% equity or so seems fair based on math. Maybe this isn't an angel though?

Maybe I have this wrong, are you hoping to debt finance this instead of equity finance? If so, why not just go to a bank? Interest rates are so low. 

Like I said, I am curious because I haven't heard of something like this before.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

August 17th, 2016

If you can turn $25k into $7 million in 4 years you should be willing to pay a lot more for your money. I have a standing offer to anyone who wants to invest $50-$100k and I will double your money in 36 months.  I have a simple, straightforward product with an easily reachable market.  Mine has minimal CGS. You are going to launch two pharma products for $25k. I am very skeptical.

Ian Shearer Executive Chairman at Parakeetplay

August 18th, 2016

I agree with Bob. It makes no sense to me to be thinking of a Loan when you say that you will have to raise equity later. You should now just raise Equity. A Professional Investor will make his own judgement on what the valuation should be.
For what its worth, in my part of the world Seed Rounds are generally done at a pre-money valuation of between 1m and 5m depending on how proven the product is.
Also as another contributor has suggested...your projections do not drive your valuation. To a professional investor they are really only relevant on two counts 1. To show your ambition and 2. To show your ability to plan and project.