companies that get funded- how do they justify the $$$ they take in

How exactly (or broadly) do these "web app" start-ups justify the need for $5MM+? I'm an entrepreneur. I'm a web developer. I keep seeing these companies get funded - let's isolate it to seed and series A - of $1-5MM. I'm putting together some forecasts on a project I'd like to take to the professional money circuit.... but I have no idea how to get to a $5MM justification.

How many years do they plan on spending the $5MM?
Is it mostly on advertising/marketing?
Is there a place to take a peek at [anonymous] copies of forecasts of companies that actually got funded?

Thanks.

-Mike

 

Most likely they have a lot of experience and a very strong business plan. Also whoever is lending the money probably owns a huge chunk of the company in the case of online web applications as you are referring to.

Personally I have no idea how you would go about approaching a potential investor, but I never like the idea of someone else owning my company.

 

That didn't address any of my questions.

 

Whether a company is an online or offline company, any potential investor wants to know.

1. how much do you want?
2. what do you need it for?
3. how long will you need it for?
4. what is he/she going to get out of it? (ROI)
5. when will he/she get their money back (+profit)?

your business plan has to show all the above and more, the investor wants to know all the ins and outs of your potential business, probably wants a seat on the board/control of the company and a large say in any and all major decisions, especially when it comes to spending his/her investment capital.

when approaching them, you need to be able to demonstrate why you need the amount you ask for and how you can justify the amount. if you can show, through market research for example, that spending 1m on advertising on tv/radio will bring in a guaranteed figure that is way and above the initial 1m, then they will most likely be interested in backing you. if, however, you are unable to demonstrate what the benefits will be then they probably wont back you.

investors deal in cold hard facts, if the facts dont match the claims they wont back you, its that simple. you need to put in serious amounts of market research, or pay someone to do it for you, that clearly demonstrate that what you claim will happen if you get $xxx will actually happen.

another factor that investors take into account is your experience, in the field you are wishing to start in and also in the past. have you already had a successful start-up that met or bettered its forecasts? have you any experience in the current field? are you capable of delivering what your business plan promises? etc etc..

the more info you take to the investors, backed up by proven factual data, the more likely it is that you can convince them to fund your idea.

good luck

Laz

 

Again, not what I asked. Thanks though. There are "web 2.0" companies that are taking in $5+ million in VC. The actual development cost is estimated (I am a developer) at 300K MAXIMUM over 3-6 months.

What does the start-up tell the VC they will do with the other 4.7 million?

 

That would depend on what they needed the other 4.7million for.

Perhaps some of it would be on marketing the new company, advertising and promotion would probably take a large portion of it. The company may wish to have the necessary staff in place that will be required to properly administer the website once it reaches a certain point in time. Some of it could be for "working capital", to cover running costs, hosting fees, legal expenses, necessary equipment, office space, etc.

All of this information would still come from the market research and the developer would need to show why it was needed. For the VC to be willing to invest he/she would still need to be satisfied that the amount being asked for was truly needed, i.e. that by investing the money the company would meet or beat the forecasts presented in the business plan and wouldn't be "wasting" the investment capital on "fluff".

Your business plan should spell out where money will be spent, why it will be spent there, and the benefits of spending that money in that particular area. Every start-up company is different, and the reasons for wanting so much capital vary from company to company. It is impossible to say, categorically, what the companies you are referring to need(ed) the capital for, what they will spend/have spent it on, or anything else without looking at the published figures for that company.

Any LLC, Ltd, Inc, etc will have to publish those figures sooner or later and they will then be available for inspection by the public, or they would be in the UK at least.

To make an immediate impact onto the WWW, companies DO need to have huge resources for advertising and promotion, of that there is no doubt. But successful marketing raises the need for extra staff, equipment, office space, etc. I would assume that not all of the capital asked for/recieved would be purely for the marketing but would also be used for the salaries and other overheads associated with making a big impact in a short space of time.