I have a business plan that involves rolling out across several very large markets with only minor adaptations to the product (a SaaS). But even rolling out in a meaningful way in the first market will require capital that I don't have. Provided I can find an investor (it's own challenge), how do I structure a deal that gets some small capital but leaves me open to a better round of investment later (from this investor or another group) once I've proven that I can succeed in the first market?

This is a great question, and critically important for every entrepreneur. Funding and valuation are at their most punitive during the earliest days of a venture, and equity is almost always more costly to a founder than debt. If at all possible, decide if there is any way prove that your concept works in a market that requires a smaller outlay of capital (or stage your startup). Once you have a proof of concept, your negotiating power rises substantially and can materially lower your cost of growth capital. Next, determine if it's possible to finance the next phase with debt instead of equity. It can put the business much farther down the valuation road before the first discussion with outside equity capital. Once you have proven the model and can show cash flow as a result of a solid and workable business plan, you may not need to discuss why $50k isn't worth 50% of your business. If going big is the only path to get started, seek an investor willing to structure a deal as debt or a debt/equity combination to help preserve your ownership until later capital raising stages, and consider partnerships in your market with firms that could both finance your launch and help you grow. It may not lessen the capital impact to you, but could help accelerate growth.

Answered 5 years ago

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