Building a Tech firm - My view - Please advise
Hi everyone,
I'm in the beginning stage of building a tech firm I believe to make sense.
The fundamentals behind the actual tech product:
The product would be a Business to Consumer type product.
The core product would cost $40k to build + $X for the actual software.
Thus I'm assuming around $70K of capital to get it started, for which I plan on using my personal capital to do so.
$70K broken down:
-
Product (excluding software) - $40K
-
Consultant fee, lawyer fee, Patenting, and other biz setup related fees = $5 - $15K
-
Marketing and Sales - $12-$24K
- The current market is insanely fragmented to the point where there's not even 1 publicly traded firm in this space. A LOT of mom-&-pop owners operate this product.
- The market serves the general mass and is a semi-essential product. Thus, even in COVID people will need this service done.
- The tech will create a cheaper, faster, transparent way of doing the job that is currently being done the old way since the 1800s.
-
The industry maintains a median profit margin of 6%-8%
-
From my analysis, the tech product can be profitable after the first 3 months and would maintain around 15% margins.
Worst , Median, and Best Case Scenarios:
In my fundamental research so far I see:
Note: I used comparable firms in similar industries to come with this values
a) At the very least the biz would stagnate around a $10m valuation (profitable) after 3-5 yrs of working on it.
b) Median case is: I think this platform can reach $100m valuation (profitable) in 5yrs
c) Best case is well... the Unicorn level in <10yrs.
About me:
I am not a super risky guy, for me to believe in something I need to do enough research and have enough fundamental understanding on it. Which is why my plan below would take 1-6 months to complete.
- I'm currently a PE and RE Investor and Broker.
My cash account is currently $250K
Age - 24
I am thinking of building it out like this:
Pat 1:
a) Speak to 100 - 250 potential customers and find out if there's demand for my product.
Currently spoke to about 10 ppl (7 of them want the product).
b) Speak to biz consultants and pay their fee to help me establish a working model and viability of the product.
Costs around $5k
Why this? Because although I should be getting 10% of the population for an accurate statistical conclusion, I can't call 1 million ppl...
Part 2: Speak to potential partners. People from Consulting, PE, or ex-CEO's who have at least 2-4 yrs of experience.
Part 3: Hang out, work on other projects (non business related) to test the relationship
Part 4: Once we established a relationship, we enter into a partnership.
Part 5: Rework the business model, speak to suppliers, get pricing quotes, and speak to software engineers
Part 6: Hang with the engineer till we establish a relationship and then partner up.
Part 7: Once all 3 have established a partnership, we start to create the product and a strong MVP.
Part 8: We continue gaining customers (via marketing and etc) while improving the product.
Part 9: After about 6 mons to 1yr we'll re-evaluate the business model to see if its worth pursing even more and if so, we start raising VC funds.
Part 10: Go from here and see what happens.
Am I missing something? Any inputs would be much appreciated
What kind of equity should I expect? I'm assuming somewhere around 40% ???
Interesting
Without knowing the details it is hard, but I’d say reach out to some tech VCs. There is always a chance you’re missing a reason as to why someone hasn’t rolled up a bunch of these, or some barrier to scale. I know in tech these greenfield opportunities exist though, so I’m excited for you! It’s just always good to chat with investors in the tech space, because I’ve met with a lot of companies that think they found something unique, but there are actually a shit ton of random seed stage companies also doing this. And you wouldn’t know unless you were a buyside person looking at seed level investments
From my understanding, many Hedge funds are outcompeting the mid-market VC firms because of how they run their investments.
Wouldn't you say its wiser to go for Hedge funds who are investing in seed-round startups?
This may be a not so wise question but,
If i speak to multiple VC funds about my startup, won't they think they can do it themselves without me?
I know of some people who try to get an NDA signed but I heard many times over its not wise.
If you're just looking for capital, sure. But hedge funds historically aren't known for adding value after they're on your cap table.
As for stealing your idea, hopefully you have enough competitive advantage for that to not be the case! But tbh it's highly unlikely that would happen.
Also, don’t ask for them to sign an NDA haha. For an early stage investment that just isn’t done when first chatting. It’s as taboo as using a banker for a seed deal
Is this a SaaS / marketplace solution? Margins feel very low and not sure if this is gross or EBITDA. If gross, should be 70-90% for saas / 50-70% for marketplace depending how commoditized.
I'm speaking of net profit.
Unless you're worried about losing equity, could be worth talking to some pre-seed VC funds so that you don't have to shell out the $70k yourself. Tons of money flowing these days.
Yes, Equity is of major concern and I'm ok with shelling out the $70k
My other concern was,
If I speak to multiple pre-seed VC funds, wouldn't they think to themselves, we can do this and don't need him?
I'm not familiar with VC as I'm in the LBO/RE space
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