How much capital to raise and how to talk about valuations
Notes from Mark Suster’s Snapstorm
Edit: 8th July 2016: Mark Suster now has an archive of his Snap Storms on www.snapstorms.com, including the one I took notes for here. Check it out.
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Mark Suster (of bothsidesofthetable.com) Snapsrtormed some fantastic advice on raising and valuations. So I took notes (warning: mobile typing) to share with the team, who being mostly above the age of 25, wouldn’t be able to figure out the Snapchat UI in < 1hr. I thought you might find them useful, too.
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How much to raise?
How much to raise? Enough to last 18 months, definitely not less than 12 or more than 24.
Asking for more? They’ll want to see the plans; well thought through showing money to be spent wisely.
Spending a bunch of money on marketing? Nope. Last thing they want to hear; hard to buy into that.
Also, if you’re supposedly going from 12 to 35 employees in 3 months; red flag.
Be very cautious about ‘we want a huge cushion’. VCs are looking for pragmatic plans.
No VC wants to hear you say you want to raise money for M&A — they’ll fund you for that at the right time if it makes sense at the time.
When asking how much are you raising, VCs are making a quick calc on your valuation. I’ll assume 15–30% dilution. Say you are raising $5m, I’ll assume minimum $15m pre-money, probably $20 pre, up to $25m pre. Say you’re looking for $2m, I’m assuming $4–8 pre, max $10m pre.
If your post money was $10m last round and you’re raising $10m, investors will assume $30–40, and if they think thats overvalued they’ll just pass, no more questions asked.
Give valuation ranges and how to talk about it
Recommend giving a range. $2–3m, 4–6, 9–12m. Gives you a range of valuations.
Most VCs say don’t do that, but you should and it depends how you talk about.
Ranges means more investors can consider you. Smaller investors can invest at smaller end, larger ones at larger end. Say;
‘We are offering a range to let the market decide the price: we aren’t going to ramp it up artificially or leave money on the table, either. We want to give the opportunity to allow smaller investors as well as larger ones to join, too.’
Investors will say don’t price in a range; they’re wrong. Just be smart about why there is a range so it doesn’t look.
‘We can make do at the low end of the range; if we have $4m that will be sufficient for 18 months, if we have $6m then of course we’ll make pragmatic investments.’
When it comes to the valuation, never name a price — every smart VC will ask, but don’t name.
Any VC will want to know post money of last round. That’s info you have to give. Just tell them. Raising $4m and you want $12–16m valuation, just say:
‘Listen. we know what the ranges are for $4m and we’re going to be pragmatic. we’ll let the market determine our valuation, we won’t try to ramp it up artificially, we know what the usual price ranges are. We will be happy in that range with the right investor.’
If you’re going to be out of the norm, i.e. your last round was done at $50m post and this round will be $25 pre:
‘We know we’re due for a little haircut.’
Strength, big price:
‘We’re only raising $5m but due to the strength of the company, we’re not taking this much dilution this time.’
Seed round, unsophisticated investors: coach them a bit.
‘In our price range, normally priced 3–5m pre-mon. We’ll be in that range.’
No matter what anyone tells you, having a range means you have more options for people who could finance you.
Anyone who tells you otherwise doesn’t have enough experience with the nuances of dealing with multiple investment parties.
(Bonus fun fact: Mark’s son is trying for soccer on the same fields where they film football games in the Modern Family).
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I highly recommend following Mark on Twitter, and his blog: bothsidesofthetable.com.
Thanks Mark.
