They say venture capitalist would like a 40% IRR which is an approximation of their ROI, but this is all fantasy based on assumptions that drive the financial projections. Pessimistic projections can be used to negotiate lower pre-money valuation prices. So the CEO/Founders are selling the potential while the investors are selling the downside risks.
Angel investors would like to see good returns like this too, but are unlikely to develop their own models to their own assumptions as the amount of work involve is large, and they have no associates to do that work. Angel syndicates on $1M+ deals might do this work though and use their results to negotiate equity prices.
The reality is few deals ever perform anywhere near their projections as there are too many unknowns that early on to have any confidence. The numbers will be rerun every time there is a learning experience and could go up or down dramatically. Angels are protected for a while by the convertible note mechanism because no valuation was set yet for them.
Learn more about our Growth and Scaling (GSP)
For a free video consultation call on what your
To get entrepreneurship tips, check out Bob's Blog
Bob Norton is a long-time Serial Entrepreneur and CEO with four exits that returned over $1 billion to investors. He has trained, coached and advised over 1,000 CEOs since 2002. And is Founder of The CEO Boot Camp™ and Entrepreneurship University™. Mr. Norton works with companies to triple their chances of success in launching new companies and products. And helps established companies scale faster using the six AirTight Management™ systems. And helps companies successfully raise capital.
Call (619) SCALE06 or email info@AirTightMgt.com for a complementary strategic consultation