Markets are hot. And your startup is growing fast.
Time to raise money at the highest price you can get…right?
Wrong. Lately, I’ve seen companies raising seed rounds at valuations of $125 and even $150 million.
A few years ago, a typical seed round valuation was more like $5 to $10 million. Now, that’s beginning to look quaint.
Getting the highest possible price for your company sounds great, but comes with some serious pitfalls. Here’s why you should resist the temptation to swing for the fences:
1) You don’t have enough time grow into the valuation. Companies I’ve seen raising seed rounds at $100 million or more often have little or no revenue.
Meanwhile, tech companies today are IPO-ing at about 15 times revenue. So for your company to truly be worth $100 million, you need about $6.7 million a year in revenue.
Most companies raise enough money in a fundraising round to last 12-18 months. The cash will rarely last more than 2 years.
Can you go from little or no revenue to $6.7 million a year in just 12-24 months? Doubtful.
What happens if you can’t? A down round, or raising money at a lower valuation.
This will upset your existing investors, who quickly book a loss on their stake. It also is a strong negative signal for your company that could impair your future.
2) You get the bad investors and repel the good ones. Astute investors know they cannot make money on $100 million seed rounds.
So who will you get instead? Novices who will provide bad advice and offer few connections.
Your company will be much better served in the long term if you have Sequoia on your cap table. Their name, the advice they can provide, and the doors they can open will be invaluable.
But if you’re raising at an unrealistic valuation, they’re unlikely to participate.
I know that getting a huge bag of money for a tiny slice of your company is appealing. But if you want to maximize the long term value of your startup, raising at a more reasonable valuation is the ticket.
Aim for a seed round between $8-25 million, depending on how much traction you have. Then get to work building.
There will be plenty of time to score that giant valuation later!
More on tech:
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Photo: “Galvez St Louis Stop Sign Grove 2” by Infrogmation is licensed under CC BY 2.0
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