There is one sure thing when it comes to start-ups; you can’t get investment without crunching numbers.


1. How big is your market? 



Consider the example of Nimble. It sells storage that’s a hybrid of traditional spinning disks and arrays of flash memory.

Nimble targets a segment of the $20 billion network storage industry--and the figure excludes add-on software. EMC and NetApp are the market leaders. Nimble’s segment, including software, is worth $5 billion and it’s growing at 15% annually.

That’s big enough to get tens of millions in capital.

2. What’s your quantum value leap?

But that’s nowhere near enough. Your next step is to convince investors that your product gives customers much more value than the nearest competing offer--what I call a quantum value leap.



If you can’t measure your start-up’s QVL--no capital for you.



As a general rule, investors figure that the maximum share of a market you’ll be able to get is 10%. Although after the fact, some winners have gone on to snare 80% of a big market that they created. To come up with a realistic estimate, it helps if your start-up grows faster than the industry.

Nimble, for example, is growing much faster--193% annually since the end of 2010 -- than the industry’s 15%. So it should come as no surprise that Nimble expects to get grab enough market share to generate revenues of $35 million a quarter by 2014 when it anticipates a public offering.

While that would represent a mere 2% share of what is forecast to be a $6.7 billion market, it reinforces how important it is for investors to know what share your start-up will get.

4. How much profit will you get from each sale?


To do that, calculate your fixed costs (the ones like salaries, benefits, rent, and utilities that do not change with each new unit you sell). Next, figure out how much profit your start-up makes on each unit it sells by subtracting your cost to make it from its price.

From there you have to show that at some point--ideally in the next two or three years--you will sell so many units that the profit they generate will exceed your fixed costs. If you can’t do that, your investor will have a much harder time getting a return--and your capital prospects will dim.

5. How much money do you need?

With that number in hand, you still must estimate how much money you need and how you’ll use it.

For example, let’s say you’ve sold as much as you can in your home market and target future growth from Brazil. You must decide how many people, factories, warehouses, and trucks you’ll need to get a decent share of that market.

Then calculate the capital you’ll need to pay your new hires and build and operate the new assets. If you can’t give investors the details of how you’ll use their money, they are sure to pass.

6. How long before you deliver a big exit?

Finally, you have to show your investors how you’ll further enrich them.


Suppose Nimble generates $140 million in 2014 revenue when it goes public. Using a stock market value to sales ratio of six to account for its fast growth, Nimble would be worth $840 million at its IPO, yielding those series D investors a stake worth $84 million--more than tripling their investment in three years.
