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Increasing Startup Investor Comfort

By Susan Schreter
I just returned to the US after living in Belgium for 10 years.  I’d like to start a company that is based on a well-established European retail business that is growing worldwide.  The concept combines quality home furnishings with the friendly, social aspects of a beer and wine bar. I need to raise about $500,000.  How do I value my startup for fundraising?  What else should I do?

I like it!  Actually, so does my husband.  The combination of a good beer and La-Z-Boy can certainly tempt most men to open their wallets.   All that is needed is a big screen TV to draw a loyal, comfort-driven following.

All lightness aside, what you are proposing certainly has merit to potential investors.  By copying the best playbook strategies of a proven retail concept, you reduce several areas of operating uncertainty. 

In terms of preparing a well-reasoned startup valuation, you may hit the mother load of valuation support if the company you are emulating is publicly traded or is required to publish annual reports to regulatory agencies. 

Your research goal is to uncover as much information as you can to demonstrate the investment community enthusiasm for financial sound company.  Look for key facts such as the same-store sales, profitability, and return on investment details.  If the company is public, does it trade at a premium (high price-to-earnings multiple) versus industry competitors? If so, you can make a case that your potential earnings will also be highly valued.

If this company is not public, search for general business news articles describing revenue growth.  Trade publications frequently write about industry success stories.   Also find out if any European venture or private equity funds invested in this company.  Prestigious investor support plus a strong financial “story” will give weight to your own venture story and early stage valuation. 

While most ambitious entrepreneurs follow a funding path of individuals investors followed by a venture fund round, I still encourage entrepreneurs to consider a broader range of funding options.  Here are some ideas:

  • Franchise model.   A single store retail concept has limited appeal to most angel investors and venture funds because it lacks enough upside to compensate them for startup risk.  One way to leverage early investment capital is through franchising.  Early investors fund the first store while franchise entrepreneurs fund continued company expansion.  This strategy minimizes dilution of your equity stake too!
  • Vendor partnerships.  Sometimes suppliers of inventory will provide extended payment terms, provide promotion dollars, or invest in your company to secure an exclusive or preferred brand placement within your store.  It never hurts to ask.
  • European company partnership.  Yes, I know this sounds a little far-fetched, but think about it.  If the European business has not yet entered the US, consider approaching the headquarter company to joint venture.  This way, you may be able to skip the small investor round and appeal to larger venture funds for retail roll-out dollars.  I guarantee that the startup valuation on this approach will be greater than your solo effort.  Why?  Simply because there is less risk to a startup venture that is backed by an established operating base.
If you are frequent reader of this column, then you know that valuing a startup company is not an exact science.  However, whenever you can more fully develop plans to (1) reduce risk; (2) speed the time to cash-flow breakeven; and (3) expand the revenue-generating reach of your business, then the perceived value of your company will go up to check writing investors.  You can do it!

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