Ask HN: 50k round not taken seriously by angels?

[jhamar]

I am raising 50k for my startup Blastchat on iOS! However, "people" are telling me I should ask for more money because serious angel investors will not invest because I am only asking for 50k! What's up with that?

[patio11]

"People" are right, if you're talking about angel investors who are professional and subscribe to, say, Valley-or-equivalent norms.

Why?

1) Your investors will model $50k as being gone in an eyeblink. In the Valley, that's ~3 engineer-months. Angels will want your round to last about 12~18 months.

2) All entrepreneurs raising their first round are inexperienced in some way, but for better or worse, the combination of not knowing angel investors want rounds to be bigger and not knowing $50k will be gone in an eyeblink shouts Particularly Inexperienced Entrepreneur Here, which counsels against angels believing that your company will be the one out of 10 which > 10Xes their money. Angels absolutely, positively must invest in that company, and it's hard, so they reserve all their shots for companies they think might be that one.

3) You're horrifically mispricing your company relative to market conditions right now [+], which you would think would suggest a savvy investor would think "Hmm deal of the century", but which actually mostly signals "Stay way the heck away" because of the power law of startup returns ("If you make a practice out of getting great deals on good startups, you will lose money; you need to make get good deals on great startups.")

There are more fish in the sea that investors, by the way. If you really and truly need only $50k to make this business a success, one might suggest friends-and-family and/or bootstrapping and/or -- and one hesitates to suggest this but one may have used it before -- credit cards.

[+] If your company is investable, it is worth > $2 million right now. I'm taking the liberty of assuming you aren't valuing the company at that because no one does a round for < 5%.

Your company may or may not actually be investable. If you're curious, you can read on Venture Hacks. Fair warning: what the Valley institutionally considers as investable is, if one takes it as a judgement of one's worth, pretty brutal for most people building tech companies. (It's not -- I've had basically no investable company in my career until maybe the current one -- but many people wrap their self-worth up in what investors would say about their businesses for some reason or another.)

[argonaut]

Right on. One thing to note is that I have definitely seen angel investors invest <= 50k into companies, but it's always been on top of (following) a larger angel/VC leading the round. E.g. one person contributes 500k-1M, a bunch of angels contribute <=50k. But that's not the OP's case.

[trcollinson]

The amount has little to do with whether an angel investor will be interested in you. They will want to know whether you can a) make your relatively small company into an actual money making organization and b) whether they'll have enough skin in the game to be profitable. If you are asking for $50,000, but are giving away 50+% of your equity, they won't be interested because you aren't a serious entrepreneur. If you are asking for $50,000 and really need $500,000 to get a demo or a mvp out the door, they won't invest because you'll never get out of the gate. Your business plan and equity agreement mean way more than the amount. Heck, if it turns out you are the right fit and need more down the road, they will be one of the first groups to reinvest.

[jhamar]

Yeah, we are raising 50k at 1m valuation . . . . . I'm guessing they are saying this because the valuation is too high? Maybe investors want more equity . . . . Or they assume that we will need more than 50k to grow which will increase our valuation?

[trcollinson]

How did you come up with a $1MM valuation? Do you have users? If so, how many? What is your path to profitability? That's a 5% stake which might be ok. It really depends on a number of factors. My guess is that in the iOS app market for a chat app in 2015. I think that might be high. But you might also surprise me.

[jhamar]

Well we have been unofficially launched for two months and just passed 1,000 MAU'S. We have a couple of high profile users (NBA ALL STAR) and we are going to launched again on Product Hunt next week by a well known influencer . . . . The market is growing and we are solving a problem that many others have abandoned. It's just about growing this thing. We need 50k for the next year to focus on growth and increasing the valuation.

[trcollinson]

I'll try to tread on this gently. The theme of my comment is "I don't invest in hopes and dreams, I invest to make money."

I know you are saying you are working to solve a problem that no one is looking at but when you say "chat" and "ios" I can only think of saturated markets. You have all sorts of chat solutions for all sorts of needs. What makes you different? What will get you millions of users? Saying you have influencers and NBA Stars brings to mind, well, twitter. And honestly that doesn't help. You have an up Hill battle to convince me as an investor. If you can, I'll invest.

Second, your valuation is way off. Within the last 18 months we have a really successful sale of a venture backed chat application, whatsapp. They got $42.20 per user valuation. That would place you at a $42,200 total valuation. Of course, that's just a fake valuation, you aren't there. The only reason whatsapp got that much was because of the volume of non-US users they had. You have no volume. You are trying to sell me that you are work $1,000 per user. That's an up Hill battle as well. Unless you have a massive market differentiator, it's a tough sell.

I'm not saying it will be impossible. But you need to show me how I am going to turn my $50,000 into a lot more. If you can pay me back within a year, I'll take $75,000 total. If you need it for 10 years, I better see a 1000% return. Remember, many other people have startups which will give me that type of return. You have to show me why you're better than them.

[argonaut]

This is really inaccurate. These sort of metrics have very little relevance in seed investing. For better or worse (and some of the savviest seed investors have done ludicrously well this way), seed investing is not about your numbers; it's about the team, the market, and the idea. No reputable seed investor in Silicon Valley calculates seed valuations this way (a scaled function of Whatsapp's valuation and the startup's own user numbers).

[rajacombinator]

You clearly don't invest in early stage startups. Alternately, one can read this as "unsophisticated non-SV investor's perspective."

[MalcolmDiggs]

They may be right. But the good news is: You don't need investors (plural)... you don't need all the Angels in Silicon Valley to fawn over you. If all you need is 50k, then you just need one good relationship with one good Angel. What the masses of investors think about you doesn't really matter, just try and find the one who's the best fit.

[0x400614]

You can't even hire one person with 50k.

[jhamar]

Actually, my team & I can live off of 12 months and work on Blastchat 24/7!

[SEJeff]

Where are you living to be able to live off of that with a team for a year?

[jhamar]

NJ - 15 minutes from NYC - 50k will be used for some growth hacks and living expenses at my dad's house . . . . just hustling man!

[pavornyoh]

I am curious to see the answer to the question @SEJeff asked. How big is your team for you guys to survive on $50k for an entire year?

[Zergy]

I believe it was a poor attempt at sarcasm.

[jhamar]

No sarcasm . . . How is it not possible to survive for a year for 50k? . . . We do not need an office or need to hire any employees - we just need some hustling cash! . . . where are you guys from?

[pavornyoh]

@Zergy.. I hope so. I have tried thinking where in the U.S can you achieve this you know.. :)

[trcollinson]

This makes the very poor assumption that the only reason you raise a round from an angel is to hire people. A small business can, and should, be able to do quite a bit with $50,000.