Answer This Question & You’ll Get Unlimited Funding for Your Startup

This is an influencer post by Jason Calacanis, Entrepreneur & Angel Investor

“How can this company return 100x on my investment?”

Answer that question and you will have an unlimited amount of investors for all time, because investors are playing for Golden Tickets (almost universally).

Let me run you through some examples.

FundingMY BLOGGING COMPANY

Weblogs, Inc., my second company, created Engadget, Autoblog, and 80 other blogs when we sold it to AOL for $30m — 18 months after we started it.

When Mark Cuban invested $300,000 for 15% of the business we had a $2,000,000 valuation. Now, Mark never asked how this business would make him 100x on his money, but in my mind I had a very specific answer for how this business *could* grow fast.

  1. 100x on his money would be $30,000,000, which would require someone to buy the company for a $200,000,000 valuation.
  2. We had five blogs when he invested and I predicted that we could get 100 in three years. We would simply launch a new blog every two weeks!
  3. If each blog made $100,000 per year we would have a $10m per year business, and each blog would be manned by a $50,000 per year writer. That would give a 50% margin.
  4. $5m in profits at 40x earnings (for a high-growth startup) = $200,000,000 (from an aggressive buyer).

Now, we had < $100,000 in total revenue when we sold, but he still did ~15x his money in just over a year — not too shabby!

MY HUMAN-POWERED SEARCH ENGINE

I had a crazy idea back in the day that humans could build search results just like the Wikipedia built an encyclopedia (Jimmy Wales, co-founder of Wikipedia had a similar idea around the same time).

At the time I was hot, the Wikipedia was hot, and I pitched this idea to the best investors in the world. At the time it was clear that search was $100b market so my idea was, “If we get 1% of that market it’s a billion dollar company!” In truth, today, you would be worth a LOT more than that.

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Investing in Mahalo at $10m or $100m made a lot of sense and we got a lot of amazing investors. We did get to 15m uniques and $10m run rate on AdSense — but we missed the window to sell before the big Google SEO correction (called Panda). Hard lessons learned, but we’re still alive: I’ve built Inside.com out of those Mahalo ashes with a similar concept to both Mahalo and Weblogs, Inc. — and it’s working! Never give up, never surrender!

HOW YOU CAN DO IT

How do you model this for your startup in plain English, and that’s credible? Follow these steps. Important to note, not every angel or investor is looking for 100x. Some are looking for 50x or 25x, or to learn and have fun. Know your investor, ask them, “What type of returns are you optimizing for?”

For me, I look at every deal and say, “Does this have a chance to go 100x?” If it doesn’t then I’m out. Not because I need to make 100x on every deal, but because hitting 100x on ONE DEAL pays for lot of startups flaming out! Also, why would I invest in something that has a best case of a 10x return when I could invest in something with a best case of a 50, 100, or 1,000x return? You swing for the fences in this angel game I’ve learned.

VALUATION

First, it helps if you start with a reasonable valuation. If you are trying to answer the 100x on your money question and you’re starting at $2m it’s a lot easier than $10m. I know this, because I turned down a number of startups in the past year because I said, “You know, I can see this business growing to a $250m business, but that would require $5-10m in profits (25-50x on earnings). In order to make 100x on it the business would need to be valued at $2.5m right now.”

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Later stage investors are “cash on cash” investors. They look at putting $100m into Twitter in a late stage and “only getting 10x” as a huge $900m victory — as they should. We are talking about early stage investors in this piece. For later stage, drop a zero from 100x!

REVENUE PER CUSTOMER

Second, have a plan for how much your customers will pay proved out. You only need to have one person tell you, “I would pay $25,000 per month for this product” to get the conversation going. One startup I invested in recently came to me having landed a handful of six figure deals per year just six months after I invested. I immediately developed a plan with them of how we will now sell that performance — six figures per month in recurring revenue — to our next round of investors so *they* can see a 50x+ return on investment.

NUMBER OF CUSTOMERS & COST OF ACQUIRING THEM

This is obvious stuff, but being able to identify how many people need your product, and what it will cost to get them on board, really helps. If you’re doing a news application (like I am with Inside.com) it’s a hard, hard task. “Ummm…everyone in the world with a smartphone or web browser is a potential customer, and you can acquire App installs for $1-5 after you lose customers who have downloaded your App and no longer remember or care about you.” This is easy in enterprise or products, which is why so many founders rushed in to enterprise over the past couple of years.

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EXPANDING MARKETS HELP, PRODUCT EXTENSIONS HURT

Explaining to an investor that you’re going to make $1m in San Francisco for your food delivery service (think Sprig, Postmates), before moving out to 19 more cities in the USA and 20 cities internationally, is super credible: same product, same playbook, new market.

However, saying you are going to go from a search engine to a mobile operating system and self-driving cars, like Google has done, is NOT credible. Wall Street has had/is having a hard time believing that Google can execute exceptional products in a large number of verticals — and that’s Google! Google … with unlimited cash, brain power, and a 1B+ user base!

In summary: If you explain some combination of data about your customers with a reasonable valuation, it’s fairly easy to explain to folks the *possibility* of them getting a meaningful exit.

I like to do this in a sentence and NOT with a huge spreadsheet. Great founders can walk up to the white board and do the simple math and explain their strategy.

Now, it’s not reasonable to point to other folks who exited and say, “We’ll get some percentage of what WhatsApp got from Facebook” — but that doesn’t stop founders from using that moment in time as a proof point.

Optimizing around the possible return of your investors shows you understand their key issue: getting a return so that they can keep angel investing (or are able to raise another fund).

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Disclaimer: This is an Influencer post. The statements, opinions and data contained in these publications are solely those of the individual authors and contributors and not of iamwire and the editor(s). This article was initially published here

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