Fundraising: valuation and how much to raise
Part 6 of a primer on early stage tech fundraising based on YCombinator's guidance and my own learning in-the-trenches as a successful founder
Previous posts in this primer:
How much to raise
I wish I could tell you there’s a science here, but it’s far more of an art. You should target keeping your monthly burn <$50k before product market fit (PMF). Staying lean and small will help you iterate faster to PMF. I’ve seen over and over companies who are pre-PMF (including my own) hire too many people, which slows down iteration and decision-making, and then are able to move faster once their team becomes smaller again. You’ll want to raise an amount of money that will last you for 18-24 months. If you’re in a hot market and can get a good valuation, you may want to raise a bit more, but keep in mind that raising more will incentivize you to hire more people, which may slow you down if you haven’t found product market fit.
Valuation
Again, there’s no science here. Ultimately, the valuation you can command has much more to do with supply and demand for your raise than any underlying inherent business value. Are you in a hot market (e.g., crypto in 2021, AI in 2023)? Do you have a strong investor network and are you naturally great at fundraising? Are you part of a team with a strong track record of success, or a previous successful founder? All of these will help you command a higher valuation. Or, are you a solo founder and/or first-time founder? Operating in a market that’s less desirable to VCs? In the middle of an unusual market slowdown? You’ll need to lower your expectations.
Expect to sell 10-15% of your company in a seed raise; if you get a lead investor, they’ll likely have a percentage minimum that they’ll want of your business.
Here are some of the things you can do to justify a higher valuation:
Have actual revenues and solid month-over-month growth. Timing your raise on the back of a few months of strong growth will help.
Raise at times that are easier. While there’s not infinite flexibility here since VC heat ups and cool downs seem to come in multi-year cycles, noticing when you’re in a hot period and choosing to respond to that quickly can make a huge difference.
Manufacture scarcity. There’s nothing VCs like more than getting into a hot deal their friends missed out on. More on that in Fundraising: energetics.
When deciding on your valuation, the best thing to do is talk to people. While you’re having your early conversations with other founders, those are the best people to ask if they’ve raised recently since they’ll be the most empathetic and unbiased. VCs will have more data points since they’ll have seen more deals recently, but they are incentivized to keep your valuation low, so take their advice with a grain of salt. You will likely be able to tell which ones are answering for themselves and their interest vs truly trying to help you make the right call. Anyone who’s already invested in you is more likely to be honest about what you can command, but if you are expecting them to invest again, a grain of salt is warranted.
You can raise your valuation as you go. While this isn’t YC’s default advice, if you start fundraising and learn you have a lot more interest than expected, you can close your first $1M at your initial valuation and then bump it up for subsequent investments. Just make sure that anyone you offered the initial valuation to has the chance to come in at that valuation before you raise it. This is a great way to get folks across the finish line quickly - “we’re raising our first $1M at a $10M valuation,” just be sure you know you will be raising it successfully before signaling you’re planning to do so. It’s not a great look to say “we’re raising our first $1M at a $10M valuation and then will consider raising the valuation”, and then learn that you’re struggling to raise at the $10M since if you don’t later raise your valuation, it will be a negative signal to investors.
Next up: fundraising with SAFEs
Luna Ray works with post-PMF founders as an executive coach. She is the founder and Chair of YCombinator-backed Plura and ex-Meta, Instagram, Faire, and Bain & Company.