During my seven years as a private equity investor and now as CEO of equity-based crowdfunding site CircleUp.com, I have met with countless entrepreneurs looking to raise capital. As any entrepreneur knows, competition is fierce for investor dollars. Out of the 6,000 or so companies I have evaluated over the years, my previous private equity firms invested in fewer than 1%. The bar is high for entrepreneurs. So how can entrepreneurs maximize the likelihood that they will raise capital? Below are 5 rules for entrepreneurs looking to raise capital.
1) Set your valuation appropriately. Whether you are Zynga (ZNGA), Apple (AAPL) or LinkedIn (LNKD) in the public markets, or a sub $5 million food company, the quickest way to scare off investors is to set your valuation at a number that is disconnected from the results of a typical discounted cash flow analysis (DCF) or evaluation of comparable transactions would value your company. Four years ago I met with an ice cream company that was under $2 million in revenue, in an industry facing strong headwinds, and trying to raise capital at a $15 million valuation. I quickly killed the deal and the company thought I was crazy to turn down the opportunity (he wasn’t shy about voicing his displeasure). Fast forward to today and the company is still under $2 million in sales and still has not raised the money they need, but is still asking the same valuation. Remember, good investors see hundreds of opportunities per year; entrepreneurs generally focus on the valuation of just one company, their own. Don’t miss out on raising capital because your expectations are out of line with the market. Listen to feedback.
Read entire article here