I have a business plan that involves rolling out across several very large markets with only minor adaptations to the product (a SaaS). But even rolling out in a meaningful way in the first market will require capital that I don't have.
Provided I can find an investor (it's own challenge), how do I structure a deal that gets some small capital but leaves me open to a better round of investment later (from this investor or another group) once I've proven that I can succeed in the first market?
A convertible note is a possible route. It would provide the owner with a discount to the price set at your next round of funding. For example, assume you give the note holder a 50% discount on your next round. Then your Seed Round sets the price at $10 per share/unit, the note owner would be able to convert their $50,000 for 10,000 shares ($5 per share). You'd have to negotiate more specifics such as interest payments, term length and any assets used as collateral in the event that you end up in bankruptcy.
Feel free to reach out with any questions or to set a time to talk.
Trying to raise money with no customers/revenue will always put you at a disadvantage when trying to bargain for any deal, and you will always end up giving more than you should.
What I would suggest is to carefully analyze which is the minimum runway capital that you need for the launch of the first market and to demonstrate that a need exists.
* Decide which is the market with the best chances to get customers on.
* Outline the bare minimum that you need to build and launch a MVP in that market (dev, PPC campaign ...).
* CLEARLY build a timeline of events and milestones linked to above.
* Add 25% to both money and time for some extra runway that you will surely need.
* Go and pitch to angels JUST for this initial / clearly defined stretch. If you have stomach for it, consider FFFs (Family, Friends and Fools) for launch (best possible deal).
* In any case, difficult to get something for anything short of 10%.
Another option, if you idea is really great, is to apply for an accelerator (there many, many) that will get you some cash, speed up your success/failure and give you some contacts for approx the same %).
Cheers,
Pere
This is a great question, and critically important for every entrepreneur. Funding and valuation are at their most punitive during the earliest days of a venture, and equity is almost always more costly to a founder than debt. If at all possible, decide if there is any way prove that your concept works in a market that requires a smaller outlay of capital (or stage your startup). Once you have a proof of concept, your negotiating power rises substantially and can materially lower your cost of growth capital. Next, determine if it's possible to finance the next phase with debt instead of equity. It can put the business much farther down the valuation road before the first discussion with outside equity capital. Once you have proven the model and can show cash flow as a result of a solid and workable business plan, you may not need to discuss why $50k isn't worth 50% of your business. If going big is the only path to get started, seek an investor willing to structure a deal as debt or a debt/equity combination to help preserve your ownership until later capital raising stages, and consider partnerships in your market with firms that could both finance your launch and help you grow. It may not lessen the capital impact to you, but could help accelerate growth.
