What Do You Do When Cash Investors Say No? Try This to Find Investors Faster

 

Stop Wasting Time Chasing Cash Investors Too Soon 

Finding cash investors can be a challenging task. A 2020 survey by Fundable found that 30% of startups seeking funding are unable to secure any capital, and only 1% of startups ever raise over $1 million in a seed round. Additionally, cash investors typically require substantial returns on their investments, often in the range of 20% or more.

Equity Compensation - Find Investors Faster

Many tech giants rely heavily on the sweat equity of their founders to get started. Think of the early days of Apple or Google. Founders Steve Jobs and Steve Wozniak, or Larry Page and Sergey Brin, spent countless hours developing their unicorns. This sweat equity was the foundation that attracted the cash investors needed for massive scaling. 

Deciding to pursue "sweat equity" instead of cash investors is a big decision for founders, a balancing act that can shape the trajectory of an emerging business. One forged in relentless labor and work, the other can pay for growth.

Sweat Equity, is Time Better Than Money? 

Sweat equity refers to an arrangement where a founder or advisor receives equity in exchange for the value contributed to a business through work, time, networking, and introductions. These type of founders are typically hoping they will be paid well once money is raised or they will cash-in when you reach a liquidity event. Benefits of buying resources with sweat equity include:

• Sweat equity is a way to attract talent that the company cannot currently afford.
• Advisors contributing sweat equity often brings valuable expertise and networks.
• Those contributing sweat equity share your risk of the business failure or success.
• Allows startups to conserve limited cash resources.   
• Can enhance credibility and help attract cash investors.

Message Opportunities@miamiventurecapitalfund.com if you are interested in exchanging your time for equity in businesses.

Is Cash Still King?

Cash investment involves providing monetary capital to a business in exchange for equity or other financial returns. This can come from various sources, including venture capitalists, angel investors, or individual investors. They give you money, and in return, they get a share of your company. Financial Investors typically expect to make them a lot more money than they invested. Benefits include:

• Cash pays the bills. You cannot use sweat equity to make your credit card payment (yet...)  
• Provides essential funding for long-term growth and expansion.   
• Requires founders to meet investor expectations.

Message Invest@miamiventurecapitalfund.com if you are interested in pursuing high returns while supporting entrepreneurs by investing cash into unlisted businesses, Invest@miamiventurecapitalfund.com

My Thoughts 

• Cash investors that also invest sweat equity are the best because they have skin in the game and are taking responsibility for helping you reach milestones/goals.
• Sweat equity investors are easier to find, but typically harder to keep than cash investors. I plan on writing more about this in the future if there is enough interest about this topic.
• Theoretically you have an unlimited piggy bank of equity, but you better protect your cap table and valuation to avoid down rounds. Hockey stick growth for your investors is expected, anything else can kill future funding rounds
• Consider advisory shares, unit appreciation rights, or warrants vs. units/shares as sweat equity compensation. Consider selling SAFE notes vs. actual equity to cash investors. Giving up too much equity early can dilute the ownership and lead to loss of control over business decisions.
• Both involve risk. Sweat equity risks time and effort, while cash investment risks financial capital.
• Sweat equity valuations are often somewhat subjective, whereas cash investment valuations are typically more structured.   

Are you a cash investor that wants to invest sweat equity into a early-stage businesses with huge upside potential? Message Info@miamiventurecapitalfund.com for more information.

Want More?  

We are looking for advisors, active/passive investors, and businesses interested in pursuing high returns while supporting entrepreneurs, Invest@miamiventurecapitalfund.com

Please message Opportunities@miamiventurecapitalfund.com if you are interested in promoting your business to to our 100+ portfolio companies and our growing community of over 30,000 executives, entrepreneurs, investors, lenders, founders, venture capitalists, investment bankers, wealth managers, and physicians

Are you looking for funding or interested in boosting the value of your company? Email us information about your business, Funding@miamiventurecapitalfund.com

Sources and AI Assistance 

gemini.google.com

openai.com/chatgpt
deepseek.com

Disclaimer

All information in this and any of my posts are subject to change and may not currently be accurate. In addition, some of the labels and names are used for test-marketing purposes. Contact me directly if you want the most recent and accurate information about any of the content in any of my posts. This is also used for entertainment, informational, and discussion purposes. This does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or any other product or service. We are not offering any legal, investment, tax, or medical advice.

Remember this: Whoever sows sparingly will also reap sparingly, and whoever sows generously will also reap generously.

2 Corinthians 9:6

Superbowl 2020 - Making Money as an Angel Investor, Valuing Angel Investment Opportunities, and the San Francisco 49ers

Superbowl 2020 brought us Kansas City Chiefs vs. San Francisco 49ers, Hummer EV vs. Genesis SUV, Jennifer Lopez with Shakira, and Tom Brady vs. potential retirement. It also brought us some interesting facts for angel investors and valuing angel investment opportunities.  

Angel Investors, Valuing Angel Investment Opportunities, and the San Francisco 49ers 

The York family bought the San Francisco 49ers in 1977 for $17 million. Forbes estimates the 49ers’ value at $3.5 billion, making it one of the 10 most valuable sports teams in the world. The San Francisco 49ers have not won a Super Bowl since 1995.

Why is this business so valuable? 

The NFL has 32 teams. Every team gets an equal cut of the national revenue that includes money from TV rights, sponsorship, licensing, and merchandise sales. It doesn’t matter how many games each team wins or loses. National revenue is estimated to be more than $8 billion, with each team receiving more than $250 million. This is on top of local revenues, including ticket sales.

These teams obviously have expenses. Player salaries are probably the biggest expense. For the 2019 season, there was a salary cap of $188 million per team, and owners have to spend at least $167.5 million. 

How do we get to a $3.5 billion value?

Calculating a reasonable price, or valuation, for a business can be a challenge for angel investors. Notice I stated that the angel investor should be determining the price. This is the opposite of how most angel investment transactions are taking place. Early-stage businesses typically establish the value and sales price. Some avoid the valuation discussion by delaying the conversation until later using a SAFE note. 

However, angel investors are the ones in control. I estimated there are approximately 30 million angel investment opportunities, but less than 1 million active angel investors. The 21st Century version of the Golden Rule applies here… He (or she) who has the gold, rules…. 

There is no “one size fits all” approach to determining the value of a startup. However, there is a wealth of ideas on how to accomplish this, thanks to a wide array of methodologies created by experienced entrepreneurs and angel investors. It makes sense to consider the most credible methods and define your own approach to valuation. Here are the methods I consider.

Scorecard Valuation Method

The Scorecard Valuation method, created by Bill Payne, is one of the most popular methodologies used by angels. This method compares the startup seeking funding to other funded startups by creating an average valuation based on factors that include region, market, and stage. 

The purpose of Scorecard Valuation is to compare the startup to the perception of other startups within the same region. Payne recommends using these factors:

Strength of the Founder(s) (0–30%)

Size of the Opportunity (0–25%)

Product/Technology (0–15%)

Competitive Environment (0–10%)

Marketing/Sales Channels/Partnerships (0–10%)

Need for Additional Investment (0–5%)

Other (0–5%)

Berkus Method

The Berkus Method was developed by super angel investor David Berkus. His approach assigns a number, a financial valuation, to each major element of risk faced by all young companies and credits the entrepreneur some basic value for the quality and potential of their business idea.

The Berkus Method uses five qualitative and quantitative factors to calculate valuation: 

Sound Idea (basic value)

Prototype (reduces technology risk)

Quality Management Team (reduces execution risk)

Strategic Relationships (reduces market risk)

Product Rollout or Sales (reduces production risk)

The Berkus Method also assigns a monetary value to each factor. The maximum value that can be assigned to each factor is $500K, meaning that the pre-money valuation can total up to $2.5M. Berkus sets the “hurdle” number at $25M, achieved in the fifth year in business, to allow the investment to achieve a ten-times increase in value over its life.

Market Multiple 

This approach is popular with venture capitalists because it gives them a good indication of what the market is willing to pay for a company. The market multiple approach values the company against recent acquisitions of similar companies in the market.

While most established corporations are valued based on earnings, the value of startups is commonly determined based on revenue multiples. Placing a value on young companies requires extensive forecasting to assess what the sales or earnings of the business will be once it reaches maturity. 

The intent of the market multiple approach is to deliver value estimates that come close to what investors are willing to pay. The challenge is that comparable market transactions can be difficult to find, especially in the startup market. Companies that often represent the closest comparisons are early stage, unlisted companies. 

Development Stage Valuation 

The development stage valuation approach is often used by angel investors and venture capital firms to generate a rough range of company value. Investors set these values based on their experience and values vary depending on the company’s stage of development. The further the company has progressed along the development pathway, the lower the company's risk and the higher its value. Here’s an example of a valuation-by-stage model: 

Estimated Company Value Stage of Development

$250,000 - $500,000 The business idea or business plan exists

$500,000 - $1 million The management team is in place to execute the plan

$1 million – $2 million A final product or technology prototype has been developed

$2 million – $5 million Strategic alliances, partners or customers are in place

$5 million and up Revenue growth and a pathway to profitability is imminent

Oftentimes, private equity firms will create milestones for providing additional funding. For example, the first round of financing may be dedicated to employee wages while a subsequent round of funding is designated to mass produce and market the product or service. 

Conclusion

The startup valuation process is as much art as it is science. Determining the value of a young company is challenging because the factors contributing to success are uncertain. The good news is that the startup community offers many talented and well-established investors who have accumulated very valuable experience and are willing to share their knowledge. New angel investors will benefit from doing their research and listening to the more experienced investors they meet along the journey. 

Contact Info@omegaaccelerator.com if you are interested in making angel investments.

Are you looking for investors for your business? Contact us at funding@omegaaccelerator.com.

Sources:

http://freakonomics.com/podcast/sports-ep-2-update/

https://medium.com/humble-ventures/3-ways-angel-investors-value-pre-revenue-startups-ee05c81c6d80

https://www.investopedia.com/articles/financial-theory/11/valuing-startup-ventures.asp

http://blog.gust.com/valuations-101-scorecard-valuation-methodology/

https://rencarlton.blogspot.com

https://twitter.com/RenCarlton

https://www.youtube.com/channel/UCmxQWgUDlPJo0IHCIa6SzrQ

https://omegalegacyacceleratorx.com/

https://www.facebook.com/TheOmegaAccelerator/

https://www.instagram.com/omega.funding/

https://rencarlton.blogspot.com/2019/09/funding-session-with-ren-carlton.html




Disclaimer:  This does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or any other product or service.  We are not offering any legal, investment, or tax advice.  All stories are based on true events, but are significantly altered to protect the identity of the individuals involved.