Wednesday, October 26, 2011

Pitching to Angel Investors: Your Business Model and Financials

The business model describes how much revenue you make from each customer, along with how much it cost to acquire, sell, and support that customer and the profit left over. The investor wants to see the business model to understand the level of profitability and the scalability of the business.

The financials reflect in numbers what the previous sections described in words. They must be consistent. If you are showing a revenue growth rate of 100% per year and your business model indicates you need a sales person per $1M of revenue, then these numbers should come up in the income statement.'

For companies already in operation, it’s useful to show the past year and the coming four years. In other words a five year window is used. In addition to the income statement, there also needs to be a cash flow statement and a sales forecast that breaks out ASP (Average Selling Price) and unit growth. Investors want to see gross margins and net income to understand the profitability of the business.

Funds Sought and Use of Funds
It’s important to state how much funding you are seeking in this round. If you’ve received a previous round of funding it’s helpful to show what you accomplished with that funding. Achieving milestones demonstrates your ability to execute which is one of the key questions the investor will be asking. Also, for the funds sought in this round show how those funds will be used.

Finally, discuss the exit strategy. How will the investor get their money back? Will it be a merger and acquisition (the most common form today), an IPO, or some other method. This is how the investor can calculate an expected rate of return.

Investors often look for market validation. List the customers you have closed to demonstrate that customers will buy your product/service. If you don’t have any customers, it’s advisable to get a few of them signed up before you go out for fund raising. It’s also important to list customers in the pipeline with forecasted sales expected from each. Showing your customer’s results from using your product/service in the form of an ROI or even hours or dollars saved goes a long way to proving the value of your product/service.

Best regards,
Hall T.

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