Of course your company is fantastic, but would anyone give you money for it? As investors, we see many companies who fail to ask themselves that question. If you are looking for investment, it is critical that you know what type of company it is that you are building.
In general, there are three types of companies that we see in the marketplace. The first type is a small ($200k – $400k) company – often an app company – in which you do most things yourself, basically buying a job you are control of; that is, if you don’t keep working, you lose income, so while you have control, it’s hard to take a month off for vacation.
The second type we call a “lifestyle business.” These companies generate a significant enough annual income ($1 to $2 million with a 10 to 20 percent bottom line, depending on where you live in the country) that you can build enough of an infrastructure allowing the company to function without you day-to-day, giving you flexibility to spend more time with your family or travel. Both of these types of companies are great opportunities, but neither generate enough of an economic return to interest investors, beyond loans from friends and families.
The third type of business, however, is specifically focused on growing and building into something attractive to investors. People invest in your business for multiple reasons – your product, your customer base, your market share – but the key aspect is the ability to further grow your company and see a return on investment. Investors will pay what it is worth to them, not what it is worth to you. This means if you’ve built your company up to $10 million but it’s as big as it will ever be, no one will pay you $10 million since they will not recapture their investment. But if you are at $5 million with room to grow up to $40 million, someone could look at spending $10 million, then grow it to $40 million. Thus increasing the value 4x. That’s why it’s better to have 10 percent market share in five markets (states) rather than a 10 sites in all 50 states. A more concentrated presence gives an investor the opportunity to take you to 10 percent in 45 more states.
When Arc makes an investment, what we evaluate first is who would want to acquire the company and how long would it take to get it there. So as a company seeking investment, you have to ask yourself realistically if you are building a job, a lifestyle business, or if it really is a company that someone would want to acquire. If you are looking to build your business into something attractive to investors, we provide more insight into assessing and increasing your company’s worth in our new Kindle article, “How Much is My Business Worth? And How Can I Make it Worth More?,” available for $2.99 in the Kindle store. We hope you’ll find both resources useful, and as always, contact us at Arc for information on how our services can help your company take the next step in its growth.
(Photo credit Jeremy Bronson on Flickr)