Question

Roger's brother, Henry has also been working on a new venture. He has invested $20,000
and six months of sweat equity to date in developing the concept. While he believes the idea has
the same growth and profit potential as Roger's company, he knows that outside investors will
require more detailed research and proof of his business model before putting up the $800,000 -
900,000 required to launch the company.

To take the company to an appropriate stage for serious outside financing, he seeks to raise
$100,000 from outside investors. If he is right, the company will then have a prototype product,
contacts with key customers and a well thought out business plan. If he is wrong, while it is
possible that the business idea could be reformulated and salvaged, it is likely that the money will
be lost and he will move on to a new project.

a. How should Henry approach the fund raising process for this seed stage project? What
type of investors should he try to recruit? What problems will he have in raising money?

b. How should Henry value the company at this point? Should he seek to raise debt or
equity? What deal terms are reasonable?

Answer 1

Answer.:

. Henry should first formulate a business model containing the term sheet which should have all the stages of funding to be proposed or expected along with the product details etc. Now in order to get the seed funding, he should have the forcasted financials details along with the cash flow and working capital ready to be presented to the investors. Henry should approach the start up funds which lend the funds to entrepreneurs. The main problem would be convincing the investors about the feasibility of the business and then negotiating with the equity purchase. These are going to be the two key challenges.

b. Henry should value the company based on the current assets valuations, proposed leasing, product portfolio and proposed capex in the company. He should seek to raise the equity as the company would likely be a loss making business in the initial few years and hence it would be extremely difficult for him to service debt at the moment.

Getting a staged funding would be reasonable and a limited equity portion should be diluted.