MELINDA ELMBORG NOV 25, 2020
(Credits Unsplash: https://unsplash.com/photos/IQxcuHBF7Uo)
Raising funds can be an exciting and terrifying part of your startup journey. This is finally your chance to raise the money your startup needs!
Still, raising funds is hard. And if it’s your first time, you may not know what to expect. When can you raise what amount? What are investors used to seeing? How does your startup compare to others?
It’s also the moment when you have to stand in front of investors and convince them that your startup is worth their time and money.
Don’t worry. All those questions, concerns, and uncertainties… I worked at a VC firm who invested in Seed and Series A rounds. Now, I’m your person on the inside. I’ve got the answers for you.
Keep reading if you want to know about different rounds of fundraising for your startup
The first round of raising is what’s known as “pre-seed”. As the name suggests, it comes before the “seed” round. Big surprise there! This is your first major opportunity to begin building strong relationships with investors and learning what your startup needs to take it to the next level.
The “pre-seed” round as an expression is a relatively new thing, becoming much more common around 2017. If you’ve been in the game a while, but haven’t raised in the last few years, this might be new to you!
The pre-seed raising happens when you would like to start hiring your first few team members. The money raised will help stabilize your startup during the first few rocky years when revenue is low or non-existent… In most cases, a pre-seed round is between 100k — 1 million ($).
In this round, the most common investors are angels or micro-VCs who are looking to join your adventure early on, in the hopes of being part of something big and exciting in the long term.
Keep in mind, though, that this is still early days, so you don’t want to give away too large of a share to any investors. Aim for 10–20%, but draw a hard line at 25% max, and only go that high if you feel it’s truly worth it. You have more rounds to raise, so make sure you have space for future investors.
The last thing you want is to come out on the other side of fundraising with a tiny share of your own company!
To successfully raise a pre-seed round, it helps tremendously to have an MVP (minimum viable product) and proof of traction. Investors are not interested in how many features your product has. That comes with time and capital. Traction… that’s not so easy to get, so that’s where your focus needs to be until you’ve raised pre-seed.
If you can’t code, it’s not all lost! … You can take advantage of one of the “no-code” platforms, such as ‘bubble.io’, which allows you to build a platform without doing the coding heavy lifting yourself. This will let you prove traction to investors without having a full-time developer on board.
Of course the milestones you need to reach will depend on what kind of product you’re offering.
If you’ve built a consumer app, 100 active users is a great place to be. For marketplaces and e-commerce, $ 2K traded is an ideal starting point. For SaaS, subscription-based startups should have at least 10 paying customers, while enterprise SaaS should have at least one paid pilot.
In a nutshell, here are the benchmarks for the pre-seed round
Size: $100K — 1M
Valuation Pre-money: $1–5M
Who: Angels, micro VC, family offices
Milestones: An MVP with traction. Exception for founders with previous achievements (PhD, previous founder, previous executive etc.)
Consumer App: >100 MAU
Marketplace: > $2 000 in total GMV
E-commerce: > $2 000 in total Revenue
Subscription Saas: 1–10 paying customers
ARR Saas: 1 paid pilot signed
I’ll give you one guess what the next raising round I’ll tell you about. That’s right, it’s the…
Now, it’s easy to get excited about the progress you’re making. And you should be! But don’t jump the gun.
Seed round raising happens when you’ve truly hit Product-Market Fit (PMF). This is essential because you need to be able to prove to investors that your product is what users want and need.
Investors will be looking for a minimum 10% average growth month over month, but are more forgiving of large fluctuations since the customer acquisition mechanism is not yet solid… Your exact path to market domination may not be totally clear yet.
In this round, you can expect to raise between $ 1–3 million. The funds here come largely from VC firms and a few angels with deep pockets scattered about.
Once again, you’ll want to make sure you limit the share of your company that you give to investors, sticking to 10–15%. Now that you have multiple investors, giving away too much will stack up quickly…
Investors also want to see signs of potential sales and marketing channels. Provide investors with information about your CAC (customer acquisition cost) so they can see that your methods for gaining new users show potential for future growth. This will ensure that you have a solid future.
So, let’s talk about milestones…
For consumer apps, you should have around 10k active users, while marketplaces and e-commerce should be trading around $ 20k per month.
For SaaS, subscription-based startups need to be generating more than $ 10k MRR (monthly recurring revenue), while enterprise SaaS need to have more than $ 100k ARR (annual recurring revenue).
Here is the summary of a typical seed round:
Valuation Pre-money: $3–10M
Who: VCs, family offices, angels with deep pockets
Milestones: Product-Market Fit
Growth: > 10 % average month-on-month growth
Consumer App: >10 000 MAU
Marketplace: $20 000 in GMV per month
E-commerce: $20 000 in Revenue per month
Subscription Saas: >10k MRR
ARR Saas: >100k ARR
And finally, we start talking big bucks…
Here it is, the big kahuna! When you’ve seriously succeeded in scaling your startup, you can raise a Series A.
At this level, your startup should really be hitting its stride, with constant growth across your market, and maybe even some international growth.
I want to take a moment to emphasize “average growth”. Of course, you’ll have some ups and downs, but what’s important is that month after month, you maintain a steady growth of 10–20%. That means that if you have 40% growth one month and 0% the next, you won’t inspire confidence in investors. If it appears as if you have no control over your growth means it will be much harder to scale!
Your startup’s consistency, international presence, and solid growth are what attracts large VCs to invest. The large investment sums make it virtually impossible for angels to invest at this level since they don’t have that much capital.
Confidence and trust are absolutely essential at this stage because now we’re getting into big numbers… In the seed round, you can expect to raise $ 5–12 million. That’s not chump change!
You’ll need to be able to demonstrate success across different markets, whether local or international. And if you are providing your product or service in multiple cities, investors will want to see how well you’ve copied or adapted your strategy for individual markets.
At this point, we’re getting into much bigger user numbers. Consumer apps need to have between 100k — 1 million monthly active users. Marketplace and e-commerce startups should be doing over $ 1 million in business per month. Subscription SaaS need at least $ 100k MRR, and enterprise SaaS should be bringing in $ 1 million ARR.
Finally, here are the benchmarks for your Series A:
Valuation Pre-money: $15–30M
Milestones: Growth engine, international expansion
Growth: > 10 % consistent month-on-month growth
Consumer App: >100k — 1M MAU
Marketplace: $1M in GMV per month
E-commerce: $1Min Revenue per month
Subscription Saas: >100k MRR
ARR Saas: >1M ARR
There you have it! Now you’ll know what your startup needs to achieve for each of the funding rounds.
This information is super valuable because with these benchmarks you will know before speaking to a single investor how your startup compares to what investors usually see!
Knowledge is power, and knowing what you need at each step will give you a major advantage. Now, you’ll know what to focus on, so that you don’t waste your valuable time and money on the wrong things as you aim to raise your next round of capital!
P.S. For you to get started, I have created many go-to free templates and sheets that you can refer to for your startup to grow faster. Click on the link to access all the free resources. So don’t wait and grab these templates and sheets today!
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About the Author:
Melinda Elmborg was a Venture Capital Investor at the French VC firm Daphni. To help founders build, grow and raise capital to their startups, she switched careers to become a startup coach. In 2018, she started Startup Action. At the moment she is also the accelerator co-lead at Fast Track Malmö.
Based on her learnings, she has developed The Startup Action Framework that guides startups from launch to exponential growth.
So far, over 500+ founders have already joined one of her workshops and thousands of founders have taken advantage of her templates and guides to succeed with their startup.