You know your startup will need outside financing - an angel on your shoulder who blesses you with cash. But you want to keep as much control of your company as possible. What do you do?
“The object is to delay outside investment and build as much value as you can into your business before you seek outside investment,” says Bill Payne, a serial entrepreneur and experienced angel investor.
Payne founded the Vegas Valley Angels in Nevada and now is an entrepreneur-in-residence at the Kauffman Foundation in Kansas City, Mo. It’s the only large American foundation to focus on entrepreneurship, and has been at it in depth for more than 12 years.
Angel investors are a good financing option, Payne says, but should be sought only after the entrepreneur’s own assets and capital are exhausted. Angels are in the game to be compensated for risk — the earlier they invest, the higher the risk, and the more equity stake they own in your business.
Payne gives this example: A startup needs an infusion of $500,000. Few milestones have been reached. No product has been sold. Mainly, what the entrepreneur has is a good idea and a good business plan.
“The investing process starts with a pre-money valuation of the company, or a subjective discussion of the worth of the venture,” Payne says. “Because so few milestones have been met, the pre-money valuation will not be that high. In this example, say the pre-money valuation is $1 million.”
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