How much fund to raise and at what valuation

Here is another piece of discussion I had with the guys as how they agree on a valuation for the initial funding round they are working to close. A very important understanding on this came from Vineet Buch's blog on this.

1. Decide A milestone for your startup that you would like to achieve in next 12 months or so. A milestone is something which strengthen the business model or make the future growth of company more visible. It can be a product launch or break even or reaching a certain critical mass of customers etc.

2. Decide how much cash is needed to achieve that milestone. Say 'X'

3. Raise double the amount you calculated in step 2. That is '2X'

4. In seed round  VCs will typically ask for around 30% stake in the company. This translates into your startup valuation as: '2X * 100/ 30'

Ex: If you think it will Rs. 1 cr to get your product ready and attract the first client, then raise Rs. 2 cr and offer 30% to VC so your post money valuation is 6.7 cr.

In India VCs ask for at least 26% stake, which I believe makes it mandatory to have their consent in case the business need to be closed down. So founders can have some bargain to offer them stake between 26% to 30%.

Seed Investors invest around 1 cr to 3 cr. And therefor valuation one can really attract is also influenced by the VC who are investing. VCs with larger fund has a larger ticket size but are less likely to invest at early stage. Still, if  they get interested, one  can raise more funds and therefor get higher valuation.

More Money in Seed Round

An entrepreneur raising money in seed round spoke to me today. One of the dilemma he had was not to raise more so that he can save equity for future rounds.

In my experience, you will always give up 26% to 30% of your equity in seed  round. So it makes sense to plan as to raise maximum cash. there are other problems too, when one tries to raise lesser money. Lesser VCs will be attracted to the deal if one just intends to raise lesser money (less than Rs. 2 cr for Indian startup).  VCs would like to put in more  cash in fewer companies instead of putting lesser cash in many companies.

And if more than one VC is interested in your deal, you will be able to get a higher valuation for the same company and therefor more cash for same equity.