What is a reasonable amount to ask to investors?

I asked a question about this before, but things have changed.

I developed software for basketball and football teams. I have sold 32 copies @ $20 each doing virtually nothing. I wrote a few articles on the subject and teams began buying.

I made it onto a Canadian TV show where you can ask for however much money you want to help with your business. I figure there are roughly 100,000 competitive basketball teams in the world, and I would like to start charging a yearly fee of $60 a year for my product.

What would you do in my situation? I don't think my sales are high enough to ask for a lot, so I am not sure how much to ask from the investors and for what stake in my business.

I also have no patent on this and it could easily duplicated, unfortunately.

Am I bound to fail?

I'm not sure why you need investors? Based on your description you have very little development or ongoing cost, other than the effort to actually start marketing and selling your product. Investment dollars aren't magical things that sell your product for you, that's your job. If you're willing to dilute your ownership of your product, you'd better have a good idea about how you'd use the money and why you can't possibly bootstrap it yourself.

Remember, investors are looking for a return on investment -- if you can't explain how you plan to sell (lots of) your product, how can you possibly convince an investor to drop a lot of money into it?

As a side note, your top-down analysis (100,000 teams x $60/yr == "I'm rich!") is a terrible way to think about things, and will automatically disqualify you in most serious investors' minds. The proper approach should be bottom-up and based on reality, e.g. something like this:

• Each week I can make on average 50 sales calls to teams
• Of those, I expect approximately 20% to try my product
• Of those, I expect 10% will sign up at $60/year

If that math proves to be accurate, you'd be booking ~$60/week in revenue (50 x .20 x .10 x $60), not a pretty picture to a potential investor. Hopefully your actual math works out better, but you get the idea. The fact that there are 100,000 teams is irrelevant -- how are you going to reach them, and in what timeframe? And what is your acquisition cost?

Bottom-up estimates based on the realities of your business are ALWAYS the way to go, and if you are realistic about it, will help guide you in making these kinds of decisions better than anyone here can.

What would you do with the money? What are your five year projections on expense and revenue? You need to have the answers to those questions. Guesses are ok, but they need to be supportable. Then again, those TV shows don't reflect reality.

First, you can't hide the fact that you only sold 32 copies of the software - you'll get called on that sooner or later. You can, however, make that sound better by demonstrating why it should not be held against you - limited effort to date in trying to sell.

Second, your concern about a patent is very relevant. A prudent investor will want to know how hard it would be for someone to copy you - and if your answer is "really easy" then there's no investment. Getting around that might have been market capture - that is, you already hold a significant amount of the market, and therefor you have history on your side, but sadly, that isn't true.

Third, you need to know what you intend to do with the money. Investors are generally not interested in just giving companies money for no reason - they want to know what you intend to do with the money. You need to show that you have a plan and a need.

Regarding valuation (which is what this question ultimately boils down to), we need to look at what you have.

You have a product which you developed that has some (small) inherent value. Let's say it took you 1000 hours to write, test, and package it. That gives you a value of somewhere in the $25,000 range to reproduce that work.

You have 32 clients at a rate of $20 per year, or $640 of income per year. We'll assume that you've spoken to at least some of them (and if you haven't, you ought to) and confirmed that they would be willing to pay $60 per year, which bumps this number up to $1,920 annually.

So your total value is somewhere in the range of $25,000 to $30,000. If you start asking for more money than that, you'll have a problem, because there would be no way to split the equity in a reasonable fashion.

What you can do to boost your valuation is to get more clients - fast. If you can demonstrate that you're chasing teams and getting them to sign on (i.e. your conversion rate is 50% instead of 10%, and you have a sampling of 100 teams to base this on), then you've accomplished two things:

1. Your product can sell - if you can get the information in front of potential buyers, they're really interested in buying it, at the price you want to sell it;
2. You have a growing customer base, which means that the $1,920 in annual income has grown over a month to $4,920 annually.

Both those factors will allow you to push the valuation a bit higher than the strict numbers justify - i.e. if you valued it at $30,000 today, then with growth patters, you might be able to get it up to $50,000 or perhaps a bit more.

What is your customer acquisition cost? At $60/year, you have a SaaS business. Since you target organizations, for larger organizations, it will cost you money to sell to them. How much money will it cost? I don't know, but reaching larger organizations is not a cheap effort - even a mailing campaign with a 2% conversion rate will end up costing quite a bit per customer.

Try to think about the value you're bringing your customers. Is it so trivial that it only worth $5 to them per month? In other words, how much effort and cost does it take them to do what your software does for them automatically, manually?

Not knowing much about your software, but, knowing that you sell your software to organizations, $60/year sounds like a very small amount. At that price point, I am not sure you're solving a big enough problem to attract a big market.

Maybe pricing your software a little higher, and giving your customers more value for their subscription is the way to go for you. You can always discount for kids' teams and primary schools, but, if you're targeting large teams, your customer acquisition cost will be higher than 10 years of subscription, easily.