Page 142 - Business Plans that Work A Guide for Small Business

The Critical Risks and Offering Plan Sections • 133

months, but whatever the period you are funding there should be a value
creation milestone that can be achieved with each tranche of investment.
Taking more capital means that the entrepreneur gives up more equity. In
other words, taking more capital than you need dilutes your ownership
share. Taking less means that the entrepreneur may run out of cash before
reaching milestones that equate to higher valuations.
It is important to think of financing as happening over time. You want
to raise enough capital during each stage to reach a critical milestone, and
then go out and raise additional capital to hit the next milestone. This
round financing strategy preserves your equity because you give up equity
based upon the perceived value of the company at the time of financing.
When you are first starting out, you may only have a concept, no prod-
uct. The value of that concept (and therefore the company) is relatively
lower than the value will be when you have a physical product that is a
manifestation of the concept. Likewise, the company that has a physical
product but little or no sales is valued less than a company that has sales.
If, at the time you start your company, you raise all the capital you need
to penetrate the market and reach a certain sales level (cash flow positive),
you would likely have to give away most of the equity because the value
of the company is so low in the beginning. On the other hand, if you man-
age the financing over time, you will give up less equity in total.
Most entrepreneurs have difficulty determining how much of the
company they must give to investors at each stage of financing (i.e., their
company’s valuation). The reality is that valuation is always a negotiation
between you and your investors. With that understanding, a company’s
valuation is based upon what it has accomplished to date, or, said differ-
ently, what milestones it has achieved. A company that is prelaunch (just
a concept) is worth very little. Lazybones, with a proven concept and sev-
eral operating units, has risen dramatically in value. Developing a product
increases the value. Achieving sales increases the value further. So how
might you gauge the value of your company at this stage? One technique
that is relatively simple and robust is the venture capital technique. Don’t
worry, you don’t need to be seeking venture capital to use it.
The technique basically looks at what return an investor needs to
achieve and then looks at the company’s potential to generate that return.
Lazybones is seeking debt so we do not need to value the company, but what
if they decide they need to use equity. Dan is seeking $500,000 to finance the
next four company stores. Considering that the company has four successful
operating units and a 15-year history, investors would gauge the likelihood