Upfront Ventures Mark Suster’s Advice on Fundraising and Providing Value
Mark Suster is a 2x entrepreneur turned VC. He joined Upfront Ventures in 2007 as a General Partner after selling his company to Salesforce.com.
I saw Mark’s snapstorm 👻 about how much money to raise in today’s chaotic market. The following are Mark’s views. If you like his thoughts, reach out to him on Twitter, read his blog Both Sides of the Table, or add him on Snapchat for more great snapstorms.
- You should calculate how much to raise based on what your current burn rate is. The amount you raised should probably last you about 18 months, definitely not less than 1 year or more than 2 years.
- If an investor asks how much you are raising and they look at your current burn rate, they are going to do the calculations in their head.
- If you are raising way too much money, they are going to think you have naive plans.
- If you are burning 100k a month, that’s 1.2 million a year and 1.8 million a 1 year and 1/2. If you ask for 5 million, they are going to ask what are you going to do with the extra money.
3. If you are asking for a lot more money, they want to see a well-thought-out plan and that the money will be spent wisely. VCs are looking for pragmatic plans.
Biggest red flags & mistakes
- Asking VC money to be immediately spent on marketing.
- Hard to buy in if you have 12 employees today and you are going to show you’ll grow to 35 employees in 3 months.
- Say that you’ll raise money for an M&A. They’ll fund you if that opportunity comes around.
- Be cautious with the words you say. E.g. “We just want a huge cushion”
4. When someone is asking how much you are raising, they are also trying to calculate what your valuation is. They also assume that you’ll take a dilution of 15–30% of the company.
“If you tell me you are raising $5 million, I assume that minimum you are raising at 15 pre-money valuation, probably at 20 pre, you might hope for 25, maybe I could get it at 12, but I’m setting a range. If you tell me you are raising at $2 million, unless I’m giving any other input, I’m assuming it’s somewhere between 4–8 pre, max. 10 and that tells me a lot of where to look.”
If your post-money was $10 million last around and you are raising $10 million, investors are going to assume 30–40, and if they think that’s overvalued they are going to pass and not ask more questions.
Recommendation:
Pricing a range — this gives you a range of valuations. More investors can consider you. This way, small and large investors have a way to write that check. Be smart of talking about why there is a range so that it doesn’t look that you don’t know where your plans are.
5. Never name a price. Every smart VC will ask.
- Any VC will want to know about your post-money of your last round. That’s the information that you have to give them.
If you are raising $4 million and you want to get somewhere between 12–16 post, just say to a VC: “Listen, we know the ranges for $4 million, we are gonna be pragmatic. We are gonna let the market determine our valuation. We are not gonna try to wrap it up artificially. We know what the usual price range is, we are going to be happy if we get the right investors.”
6. If you are raising at a lower valuation, you need to let them know too. If your last round was done at 15 posts and you think this is going to be at 25 pre, you need to say we are here due for a little hair cut.”
7. If you have a huge strength and you think you raise at a big price, you should say something like: we are only raising $5 million but we won’t be taking as much dilution this time because the company is doing that well and we have a lot of competition.
- If you are in a seed round dealing with unsophisticated investors, you can give a little coaching. Look in our price range normally companies are priced X-Y pre-money. We will be in that range.
“Having a range means you have more options for people who can finance you and not naming your price means other people can weigh in.” — Mark Suster
Make sure you share your opinions with Suster on Twitter. What do you think? Do you agree with Suster?
Thank you for reading! Please recommend this post so everyone can see it and learn from these tips.
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