Hello, everyone. This is Alejandro Cremades, and today we’re going to be talking about
how to determine the amount to raise in your financing round. Coming up with the amount
that you’re going to be raising in your financing round, whether it’s a Seed, Series
A, Series B, or whatever that is, is really an art. But there are different methods that
you can actually use to come up with that amount. With that being said, let’s get
into it. First, are the key figures that you need to
know. On the firsthand, what you’re going to see is the monthly burn that you have.
You need to understand how much cash you are burning every month, meaning how much you’re
in the red every month that you’re operating. For the most part, if you’re at an early
stage, you’re going to be talking about staff and also the rent. Those are the two
biggest expenses that you’re going to have. Then you can add in there the software that
you’re using and any other types of subscriptions that are adding up every month to your monthly
bill. That is the monthly burn, and that is a number that you need to really have a clear
grasp on. The other figure that you want to keep in
mind is the cost of getting to your next milestone. That is without counting with your existing
revenues, and only counting with your monthly burn. How many months or how much is it going
to cost you. Maybe your next milestone is in 12 months or in 18 or 24 months. How much
money is that without counting with revenues? That is a critical figure that you need to
know. Then you have the key strategic considerations.
Obviously, on the firsthand, it’s going to be all about dilution. How much equity
are you going to be giving away? The rule of thumb in every financing round is that
you’re not diluting the equity ownership by more than 20% or 25%.
You want to always keep it under those figures so that you are not overdiluting yourself,
and you can continue to mature the business; because, remember that if you’re really
building and executing a hypergrowth business, you’re probably having to go to different
financing cycles, and on every financing cycle, you’re going to experience some type of
dilution. With that being said, you really need to have
a clear understanding of what the dilution is going to be, what is going to be the potential
valuation of the business for that amount that you’re raising, and so forth.
The other thing is the control and the flexibility. Obviously, the more dilution, the less control
that you and your co-founders are going to have. For that reason, you want to make sure
that also, you’re thinking about the potential player that is going to come in or that investor
that is going to come in and perhaps is going to share control, vote, and voice with you
at a board level with the business. Then you want to think about investment levels.
There are great people out there such as Chris Dixon from Marc Andreessen, and he says that
whatever you want to raise, you want to add on top of that 50% more just as a buffer.
Now, you’re going to have different scenarios. You’re going to have the Idealist Scenario,
where everything is falling into place. You’re getting the exact amount that you need to
execute. You’re going to have the Worst-Case Scenario,
which you need to prepare for, where you are not raising enough to reach your milestones
in 18-24 months. Maybe you’re just raising for 12 months, and that’s okay, but you’re
going to have to figure out how you’re going to go out to market right away.
Then, you’re going to have the Realistic Scenario, which is more on the conservative
side. Maybe you’re going to shoot a bit lower. Instead of going for the 24 months,
maybe you just go for the 12 right away. Again, you’re going to have different scenarios,
and you need to be able to walk the investor through what you’re capable of doing. For
example, if you give me $5 million, I can do between this, and this, and that. If you
give me $10 million, I can do a bit more and accelerate by this and that.
So, basically, what you’re showcasing to the investor is that by raising more money,
you can still deploy in a very good way and in a very productive way that money. But in
essence, what you’re doing is accelerating even farther whatever you were set out to
accomplish. In some instances, you might see the investor,
where you’re asking him for five to accomplish x or to accomplish y, and they give you double
because they want to go faster on the execution side.
In the end, remember that there are going to be two types of valuations. You’re going
to have the founder valuation, which is what you think that the business is worth, and
then you’re going to have the market valuation, which is what the market is paying you.
At the end of the day, when it comes down to putting that valuation in place and determining
the amount that you’re raising, you need to keep in mind the following things:
1) How much money you need to achieve for your goals.
2) The type of investor, whether it’s an angel, a VC, a family and friends, etc.
3) Your prior success as an entrepreneur. 4) The going rate for similar companies.
5) The growth rate of related sectors and marketplaces.
6) How likely it is that your startup will reach profitability.
7) The level of revenue currently or potentially generated by the business.
8) The team that you have around you. 9) Customer acquisition and distribution of
your company. 10) Lastly, you want to make sure that you
have a financial forecast that is really not only guiding you to understand what potentially
that’s going to be in terms of the amount to raise, but also that you can present to
the investor. The forecast is where you’re putting all
those monthly expenses, whatever it’s going to cost you, whatever hires that you’re
planning to make, whatever revenue that you’re expecting like projected income expenses.
You’re going to be putting it all into three to five years.
It depends on the investor that you’re going to be seeing. Some may want to see three years
of forecast. Others may want to see five years of forecast. But essentially, what you’re
doing with the financial forecast is going to be the following:
1) Show the financial viability of your startup. 2) Identify potential risks.
3) Provide a clear understanding of future financial needs.
4) Allow future comparisons between forecast and business operations.
5) Show financial responsibility on your part. Hopefully, this provided some guidance as
you’re thinking about determining the amount that you raise with your round. There are
some nice benchmarks for SaaS companies, such as the ones that we provide on our platform
on the fundraising training: AlejandroCremades.com/Fundraising-Training. If you like this video, make sure that you
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Going back to the fundraising training where you’re going to be able to see all these
frameworks and how to raise money, what valuation, and so forth. There, we have live trainings,
agreements, templates, and hundreds of founders all over the world helping each other. Essentially,
it’s a program where we help founders every step of the way in the fundraising journey
from A all the way to Z. Hopefully, you like this video and thank you so much for watching.