It’s Time to Start Worrying About the Next Round for Your Startup

There’s an adage that is being passed around by entrepreneurs that goes something like this: “As soon as you raise this round, it’s time to start worrying about the next round.” I think it’s a wise adage.

It’s similar to my most important principle of fund raising which is “Raise enough money to achieve a set of milestones that will attract a subsequent round of investment from new investors.”

Those two ideas are simple and logical. But what does this mean for the business on a very tactical level? How much revenue? How much dilution should an entrepreneur expect? What should valuations look like over time?

Below, I’ve tried to summarize the way a hypothetical startup might think about the cap table evolution, valuation and revenue growth. First and foremost, a huge caveat: every business is different. Every financing is unique and this data is based on generalization and medians and averages.

Capitalization Table Evolution

Below is a hypothetical cap table for a startup through four rounds of financing, seed through Series A. The table shows the common shares ownership with time and the typical investment stakes of seed, A, B and C investors. These stakes are highly variable (see caveat).

The most important line for the founding team is the last line called Equivalent Exit Price. This metric tracks the exit price of the business required to generate $30M in net proceeds to the founders with each subsequent round of financing/dilution. Keep in mind, the point of raising money is to create a larger and larger company. As always, it’s important to align VC and founder incentives on exit size

Ownership(in %) Founding Seed Series A Series B Series C
Common 100 65 50 39 29
Seed investors 15 10 6 4
A Investors 25 25 25
B Investors 20 20
C Investors 15
Pool 20 15 10 7
Equivalent Exit Price (in $M) 30 46 60 77 103

Valuation Evolution

Below is the evolution of the valuation of our hypothetical startup. Again, this is highly variable. I’m estimating valuation using the forecasted burn for 18 months of runway and dividing that by the new investor's share. It’s an estimate because I don’t take into account the dollars the insiders would contribute as pro-rata but it’s good enough for our purposes.

Valuation Evolution
Ownership(in %) Founding Seed Series A Series B Series C
Employees 7 18 45 75
Cost per Employee (in $) 12,000 12,000 12,000 12,000
18 Month Burn (in $M) 0.5 1.5 3.9 9.7 16.2
Implied valuation (est.) 10 16 49 108

Revenue Evolution

This last table shows the revenue growth of our hypothetical startup. I calculate revenue by taking the valuation and then using a calendar year valuation to revenue multiple - called CY Revenue Multiple in this chart. That figure is an average of more than 25 SaaS businesses’s financing histories.

Revenue Evolution
Ownership(in %) Founding Seed Series A Series B Series C
CY Revenue Multiple 13 11 15
Implied CY Revenue (in $M) 1 4 7

Frameworks, Not Absolutes

My aim with this post is to provide a framework for thinking through the cap table, revenue and valuation evolution of your startup over time. The particular figures will vary depending on market cycles, sectors, teams, ideas and a thousand other variables.

But in sharing this framework, I hope it helps those entrepreneurs plan for a successful financing path for this fund raise and every fund raise for their business - a little bit of tactics to promote that great adage above.

19 June 2013

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