Ohio TechAngels

I've heard John Huston speak at several events in both Cleveland and Akron, and every time, I have walked away with something valuable that stays with me a very long time. Recently, he articulated what makes sense to investors and entrepreneurs, keeping entrepreneurs focused on what's important when developing their pitch. He spoke last week at a COSE sponsored event, and here's what struck me this time (I'll paraphrase): "There is not a shortage of funding. There is only a shortage of a willingness from the entrepreneur to give up what's necessary to get funded." He also said, "Statistically speaking, most businesses exit through a merger or acquisition. Forget the word IPO! Take it out of your vocabulary." John says success in fund raising comes down to what the entrepreneur wants to get out of it in the end and what the investor has to get out of it in order to justify their investment. These two opposing forces need to come to a compromise. For the investor, they get out of their funding some multiple of their investment, which increases the longer they're in. So to attract funding, John advises the entrepreneur to work backwards when determining their pre-money valuations. Decide on an exit, choose the number of years the investment will be engaged (guess work, I know), use a benchmark multiple (for instance, in a 5 year exit the investor must make 1 times, 3 year exit, 5 times) and then show how the company will generate enough revenue to pay back the investor this multiple at exit. Most companies sell for some multiple of revenue, depending on the industry they're in. John says 3 to 4 times gross sales is the average. An entrepreneur will find funding if the return is attractive enough (as well as believable enough) and at the correct multiple. Funding efforts fail when the entrepreneur is not willing to give up as much as is necessary in order for the investment to demonstrate a big enough return for the investor.