I have already posted
Part one of this Conversation with Graham, He is a guru, he lives in Australia
and has helped startups around the world raise funding and written a book on
the subject which is also available.
“I have to explain to you that investors will
not be attracted to your project because their return on investment will not be
sufficient on the program you have outlined. Let me start here by alerting you
to some rough rules of thumb that investors use as an initial evaluation
marker.
Investors are not into investments for the long haul. They put their money into an investment and expect to get a good return so they can exit from the investment in three to five years. They will rarely stay longer than five years. The return they expect is based on these rough benchmarks: there is the 3 x 6 rule, the 4 x 8 rule and the 5 x 10 rule. Let's work on the 3 x 6 rule because that is probably the nearest to your project.
Investors are not into investments for the long haul. They put their money into an investment and expect to get a good return so they can exit from the investment in three to five years. They will rarely stay longer than five years. The return they expect is based on these rough benchmarks: there is the 3 x 6 rule, the 4 x 8 rule and the 5 x 10 rule. Let's work on the 3 x 6 rule because that is probably the nearest to your project.
What this rule means
is that an investor will expect a return on investment of 6 times the original
investment at the end of the third year of commercial operations. This return
on investment moreover, does not include any increase in the value of the
shares the investor holds in your company. So from a practical point of view your
project has to enjoy high cash flows/cash returns and you have to put money
aside into a 'sinking fund' to pay out the investor at the end of the three
years and buy back his shares.
However, remember that
equity capital is not repaid like a loan, there are no interest charges. The
business just has to do well in the marketplace so that the investor can be
paid out in due course.
I understand where you
are coming from, but investors will not come into your project based on what
have put in version 2. There are two reasons. The first is that the return to
the investor from funding a pilot study is too small. The second is that
investors will not fund research studies, pilot studies or get involved in
building product prototypes for customer testing. Investors want their money to
work from day one.
There is no revenue
potential in those three functions. It is dead time from the investors' point
of view. So they won't get involved. Investors' want to know how quickly after
they provide the money can your project effect sales and therefore generate a
cash flow.”
Read more about raising capital or Contact Graham.
Author of the 350
page, 29 chapters eBook:
'The Venture Capital Master Class:
'The Venture Capital Master Class:
Everything you have always
wanted to know about raising equity capital ... but until now, you had no one to ask'.
Buy your PDF copy now
at http://chironthebusinessdoctor.com/downloads/the-venture-capital-masterclass-ebook/ for an affordable investment in your future
of $USD 49.50.