SeedFAST is the new Seed Round
On SeedLegals, more companies now raise money outside a funding round than inside a round. We explain what's happening a...
Itâs never easy to assign a value to a company that youâve put your heart and soul into. Especially since you have to size up how much equity youâre prepared to give away as part of that equation.
When you pitch to investors, whatâs the ârightâ valuation for your early stage company? Thereâs no quick answer to this. However, we do have data from the thousands of funding rounds closed on SeedLegals to help you make an informed decision about where your company stands – and perhaps more importantly, how to justify that valuation to your investors.
Contents
Generally when building your pitch deck, youâll need to make three key decisions:
These questions are mathematically intertwined, so there are two approaches you can take:
or:
Some advisors say to raise as much as you can. The steer from VCs and angel investors is usually that you should plan to raise enough to last 12-18 months before you need to raise money again.
Time on the funding trail is time and effort spent away from building your business – and itâs incredibly hard. Here are the key questions to ask yourself:
The reason for a 12-18 month runway is that realistically youâll need to be on the fundraising trail six months before youâll have new money in the bank, and youâll need to show growth between now and then to get new investors interested.
Any shorter than 12 monthsâ runway and itâs going to be hard to hit key milestones or show any real traction. That means youâre going to find it harder to justify a higher valuation at your next round. Itâs called a runway for a reason â if you donât have lift off before you reach the end, things will come to a sudden stop!
So, if your starting point is figuring out the cash you need, then simply look at your monthly burn rate. Add in the team members you plan to hire, marketing spend, dev costs, etc and then look at your monthly burn rate again. Now multiply this by the number of monthsâ runway you need. Remember to factor in a buffer for the unknown as anything can happen – and usually does when youâre piloting a startup.
At this point, itâs important to remember investors wonât be sold on the prospect of funding your monthly burn. So when they ask about why youâre raising your target amount, remember to make your answer about milestones and not survival. Focus on the resources youâll need to achieve your goals and the length of time it will take to get you there.
As much as Dragonsâ Den makes for great TV, here in the real world, equity investment doesnât work like that. Youâre not pitting yourself against an adversary who wants to take a huge chunk of your company.
The general rule of thumb for angel/seed stage rounds is that founders should expect to sell between 10% and 20% of the equity in the company. These parameters werenât plucked out of thin air. Theyâre based on what an early equity investor is looking for in terms of return.
Investors are placing bets on you with the clear knowledge that most of their investments will give zero return. Theyâre exposed to a high-risk/high-potential scenario, so they need a decent slice of equity to get a meaningful return if things go well. And they want a meaningful level of influence and control over key company decisions if they donât.â
In the table below, you can see the average percentage of equity given away in early stage UK funding rounds on SeedLegals.
Our data shows that between 10% and 20% is the norm, with an average of 14% given away to investors at the early round stage.
The good news is that thereâs now another way to raise funds, outside of the traditional go-big-or-go-bust funding cycle. Itâs called agile funding and it allows you to take advantage of investment opportunities, whenever and wherever they appear.
With SeedLegals, itâs quick and simple to take in smaller amounts of funding as and when you need to in between funding rounds.
Previously, a little-and-often raising pattern would be a bad idea because:
Weâve changed all that with our simple and secure SeedFASTs and Instant Investments.
SeedFAST is our name for an advance subscription agreement. Itâs a quick way to take in a one-off investment before your funding round. You donât need to commit to a valuation, because they only convert into shares when you complete your next funding round. With a SeedFAST, you specify the timeframe to complete your next round – usually within a year.
Essentially, investors pre-pay for shares. This means you donât need to rush to agree to a valuation – it buys you more time to consider the right valuation to raise at, while still allowing you to take in capital.
With Instant Investment, you can quickly take a one-off investment after a funding round at the same terms as your previous funding round, using your previous valuation.
So far, weâve approached the valuation question from what you as a founder want to get out of the equation.
Of course, investors have their own systems. But exact valuation figures arenât any easier for them either. If you asked VCs how to value your company, youâd get a wide range of responses, including:
Some VCs are led by their head, others by their heart. Some will want to value your company on its own merits, while others will evaluate it relative to similar companies.
Either way, thereâs no substitute for a data-driven decision, and thanks to our data that shows what actually happens across a range of funding round sizes, youâre well placed to not just come up with a number, but justify it too.
As the UKâs favourite platform for funding rounds, we have more data than anyone else on how early stage funding rounds work. To help you find out if youâre in the ârightâ ballpark, weâve mapped out the average valuations we see according to the stage of the startup.
Bear in mind that these figures come from companies raising in the UK.
Average valuation: ÂŁ1M
Youâre looking to raise ÂŁ50K to ÂŁ100K to get your idea off the ground. Often at this stage, your investors are friends and family – and the investment terms are pretty informal. On SeedLegals, we have a streamlined funding round package to help you close a simple investment quickly. Itâs called the Bootstrap Round and it costs from ÂŁ990.
Valuation: ÂŁ1.3M – ÂŁ1.5M
Youâve spent months refining the idea, doing user testing, and building a working prototype. Youâre either about to launch or have just launched but havenât got significant traction yet. Youâre looking to raise somewhere between ÂŁ100k and ÂŁ250k, most likely from angel investors.
Valuation: ÂŁ1.5M
Youâve just launched your minimum viable product and things are going well. You now want to raise money for more product development and for marketing to grow your user base.
Valuation: ÂŁ2M – ÂŁ3M
Youâre seeing good signs of early traction, enough to get angel investors and early stage funds interested. You have revenue plans, but nothing to show yet.
Valuation: ÂŁ3.5 – ÂŁ6M
Youâre pulling in recurring revenue between ÂŁ20,000 and ÂŁ50,000 a month and steadily growing your user base. Youâre looking for investment to develop your product further and step up your marketing efforts.
Ultimately, your company valuation is whatever you and your investors agree it is. We hope that this article will help you reach a credible valuation that gives you wide investor appeal without overly diluting the founders.