Written By: Janine Kick
One of the most frequently asked questions we get asked is, “how much seed capital should I be raising?”
The answers to this question you’ll most typically hear are either:
- Enough money to get to the next major milestone in your business
- 18-24 months of runway
Both of these, of course, are really good answers!
There’s more to consider here though and it involves some really interesting triangulation that, as a founder, you should be aware of. A supporting question founders should be asking is, “what does my ‘ask’ signal to an investor?”
Generally speaking, most VCs will want to own somewhere in the region of 20% of any seed investment they make (AKA your startup!). So when you go to market asking for $2M you’re signaling to an investor that you believe your startup is worth $10M. (There’s a lot more here around ‘pre-money’ and ‘post-money’ valuation, but we’ll save that for another day.)
Let’s work through a couple of examples:
- Your ask is $2.5M
- We’ll assume 20% ownership by the investor
- You’ve implied a valuation of $12.5M for your startup
$2.5M is 20% of $12.5M.
- Your ask is $3M
- Again we’ll assume 20% dilution by the investor
- You’ve valued the company (consciously or not) at $15M
$3M is 20% of $15M.
This is all great, but what do you do with it? Alright, one last piece of information for you: according to Pitchbook the average seed stage startup in 2021 was valued around $11M. (Maybe surprising to some, the valuations for Q2 ‘22 are at a very similar level).
So the question is this: do you go big and risk pricing yourself out of the game (too high of an implied valuation), or do you ‘aim for the sweet spot’ and set yourself up to look like a good deal (lower implied valuation)? I guarantee one of these ‘asks’ will close quicker and generate more VC’s competing for your deal.
What’s the bottom line… be careful what you ask for.
Kerosene Ventures – Helping Great Founders Raise Capital