I am planning to launch a web company, which would be an e-commerce company, something like amazon.com or eBay but radically different from both. Suppose I develop the enter website and launch it and run all on my own for a few days and then seek venture capital what percentage of ownership do you think VCs will take in my company? It would be very kind of you if you can also give me a brief information about how much percentage a particular funding company has taken in a particular start up, if that information is publicly available.
I think you’re putting the proverbial cart before the horse with this question. Investors of any sort who have experience with startups don’t invest in ideas because ideas are, frankly, a dime a dozen. They invest either in teams with proven track records (so called “serial entrepreneurs”) or in successful, active businesses that need capital to grow bigger or faster.
To say you have a good idea and realize that you haven’t taken even the first step in birthing the business suggests to me that the best advice I can give you is to go, build, launch the company, gain some customers, demonstrate some sort of proven revenue stream, and then start to ask yourself about investors and investment.
You’re also citing two of the largest companies on the net, two companies that in their own ways are helping bring about a revolution in business.
Amazon from day one has been focused on building a back-end infrastructure for online commerce, with its bookstore really just a ‘proof of concept’. The company has an extremely deep level of sophistication in all things technological.
eBay, in a similar vein, has been all about creating a marketplace for buyers and sellers, producing an amazing online venue where they take a slice of every transaction without ever having to inventory or warehouse a single widget. Brilliant, and, again, a phenomenally savvy company.
I encourage you to aim high, but realize that if you can achieve even a small fraction of their success, you’ll have built an amazing company and will deserve all the rewards you would gain.
In terms of percentages, I feel that in a lot of way you’re far ahead of yourself. VC investments are based on the amount they’d invest and the valuation of the company, so there’s no fixed value. A common scenario, however, is for a VC to buy 20% of a company, where that might look like this:
• pre-money company valuation: $5 million
• VC investment: $1 million
• post-money company valuation: $6 million
• founder equity stake: 80%
• VC equity stake: 20%
There’s a lot more to it than that, and you really need to ask yourself “how do I create a living business that’s really able to sustain a valuation of $5 million dollars?” That’s not easy! There are companies that are quite the buzz on the Web, have lots of subscribers and a small revenue stream, yet aren’t worth even half of that valuation. And trust me, any investor with experience will spend much of their time scoffing at your valuation and trying to push it down to be the smallest reasonable number they can achieve.
(the reason should be obvious: if the fictional company we’re talking about was worth $2 million, then that same $1 million investment, for example, would buy the VCs 50% of the equity in the firm, not 20%)
Private company valuations are rarely disclosed, even after funding events, too, because it’s a critical number for competitors to learn. If you know that your competition is worth, say, $2 million, then you could then make some savvy extrapolations about what various facets of their business are worth.
Anyway, here are a few links for your reading list:
- VC Brad Feld’s Weblog — Brad has a wonderful way of being blunt and direct with his commentary, an excellent track record of success with his investments, and a deep knowledge of the entire Internet. He also writes about VC issues with frequency, and it should unquestionably be required reading for you.
- Growing Your Business with Google — This is the Web site for my book of the same name, a much-lauded guide to the future of business, it’ll illuminate much of your path to becoming a thriving business of tomorrow. Pay particular attention to the chapter What’s Your Core Business? too!
- Startup 101 Info — I present a couple of tutorials I wrote for IBM on small business issues on this site, and the one I think you’d find most useful is How to present your startup to investors. I think it’ll be a good reality check for your aspirations versus your accomplishments at this juncture.
I applaud your enthusiasm and encourage you to get started building your business, make it a viable entity, then start thinking about investments. Otherwise you’ll just waste your energy at this point in your company’s history.
Good luck!
Your math is wrong on the example
4m pre, 5m post yields 20% at 1m in
I have already started a women’s cab service in Delhi /NCR . i need to expand and would need an investor, how to go about it?
I agree on what you are saying above, Dave.
One thing I would like to add to the one asking the question is: Find ways to add long-term customer contracts and other IP value to your company and have a trusted IP appraiser help you out on doing a fair valuation on these items.
Make everything work in your favour so as to bring up the value in your company as much as humanily possible before visiting Angel Investors and/or VC’s.
Also follow this formula: Prove your product/service (without a product/service that works you will have no base), prove your concept (without customers buying your product/service for $X, you have nothing tangible to bring to the table when discussing with VC’s) and, prove your team. Find an experienced and trustworthy CEO who will make you and the VC’s rich.
If you are a novice entrepreneur/businessman, then you are the absolutly worst guy to run this company. Be a part of it, but do not run it. Entrepreneurs and managers are often two different kinds of people. As they say: “Entrepreneurs do the rights things. Managers do things right”. There is a clear difference. The first one is a visionairy, the other guy is a down-to earth, logical type of guy with no “fluffy ideas”.
I am a startup entrepreneur myself and I know how far up in the clouds I am sometimes..hehe.
So think about this and let’s prove that idea of yours;).
I have recently been approached by a friend who has an idea for a great web startup. He already invested personal $ and investor seed $ into the idea and has developed a alpha of the system. He approached me and asked me if I would be interested in equity in the company. This would mean, I would be the operating officer of the company. It would also mean that for the next 6 months I would have to dedicate 90% of my time to this without salary, but after we get funding the company would give me the salary. (although it is a risk of course of not getting the funding). My roles would be the help him build the company and help get series A funding for the company. My question is how much equity stake should I be asking for? Would I be considered a “Co-founder”?
HI Dave,
Your explanation is excellent and i have one doubt how do we evaluate a web hosting company? On what basis we have to evaluate like EBDITA or Revenue x xxtimes?
Betrand
I got the point you wanted to convey. The links to the blogs and webpages you have provided are very useful. Thank you very much for your clear and detailed explanation.