One of the main challenges founders face when starting their own business is raising capital. Startup founders can often be overwhelmed when faced with the complexities of startup financing. StartUpNV’s Jeff Saling speaks on this issue:
“Angel investors come in many forms – with different objectives for investments. Some angels will loan money, but most invest for an ownership share (equity) in the business. You’ll hear this expressed on Shark Tank as “$100k for 10%”, implying a $1M value for the business in this example. Angel investors make their return when the business is sold for a higher value than when they invested. While investors are entitled to a share of profits, profit sharing is not the primary means of making a return on their investment.
The implication of investing to sell at a higher price later is that the business owner must also be focused on selling the business at some point in the future — typically in 7-10 years. If the business owner or founder is building a business for their own income, they may be at odds with the objectives of their “angels.” Investors want the business to grow quickly and be worth 3 to 10 times more to a buyer, who is interested in buying an established, successful business rather than in starting one themselves.
It’s important that business owners seeking capital from angel investors understand that investors can double their money in about 7 years by investing in relatively safe public index funds. A much higher-risk investment in a private company must return significantly more to attract capital.
If you’re a founder seeking capital from angel investors, be sure your goals are aligned.”
Excerpted from Imierelda Frost’s “Funding New Business” article.
Jeff Saling from StartUpNV