Why do investors want so much?
I love working with numbers and I hope you do too. After all, business does come down to numbers—increasing the number of customers you serve each year, reducing your costs of operations, improving your gross profit margin, etc.
Trust me, your projections will not be the only numbers that investors consider about your business.
Since most investors get thesir money back from the sale of a company to another business, investors think about what overall value a company has to grow to in order for them to receive a nifty financial return.
But often, the measure of success is not just how well investors do on one investment but all other investments in privately held companies. Active investors—such as venture capital funds and members of angel investment clubs—measure success by how well their overall “portfolio” of investments performs.
I like to explain portfolio investing in this way. On average, investors in early-stage businesses (companies that are less risky investments than seed-stage companies) generally will lose money on roughly 6 out of every ten investments in privately held companies. In addition, they might get back some but not all of their investment in another two investments. This means that the one or two winners have to cover all the costs of the money losers.
For this reason, the winners must be monster home runs, not mere singles or doubles. Investors also know that large gains come primarily from owning an equity stake in a business rather than getting some seemingly higher interest rate on debt.
In general, angel investors expect to earn their money back within 5 to 7 years with an annualized internal rate of return of 20% to 40%. Venture capital funds strive for the higher end of this range or more.
If you aspire to raise big bucks from big money investors, then it’s useful to consider how much the value of your business has to grow to in order for investors, and you, to earn a healthy return.