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10 September 2020·5 min read

Dmitry Smirnov

Investment Director, Flashpoint VC

How Much Funds Should Your Startup Raise?

At Flashpoint we devote a lot of our time covering Seed and Series A deals in CEE, Israel and Finland and see roughly 1.5k new investment opportunities every year. Almost every first conversation with a startup founder ends up with a discussion about the company’s round parameters and preliminary terms the founder seeks to get from potential investors and there are several important topics to unpack here.

How much a company is raising and how much money do you really need? Asking this question we want first of all to understand whether the deal fits our investment strategy. But sometimes — more importantly — if the round size fits the stage the company is at.

Putting aside the round size, a company should have a crystal clear understanding of the following aspects:

1. What are the goals/milestones it wants to achieve and what are the main uses of proceeds from the round?

Here are some examples of smart goals:
- grow to $XXM ARR,
- open X new markets by hiring X country managers,
- go up-market by building outbound sales of XYZ people,
- enhance product’s feature set by adding XYZ modules
(this should be supported some by existing customers feedback). 

It is very important not to overcomplicate and set some realistic and achievable goals here.

2. What is the target runway?

We usually recommend having at least 18 months of runway and adjust your goals and milestones accordingly. On the other hand, it doesn’t make any practical sense to prepare for any journey to the next round that lasts longer than 24 months. So in an ideal scenario, we’d plan 18 months base case runway + 6 months reserve for the next fundraising.

3. Target burn (which can be calculated from the round size and target runway) vs Historical burn sanity check

Our rule of thumb is to stay away from companies that are planning to increase burn by more than 3x compared to the average last 12-month burn rate. Investing money efficiently is a skill and it’s hard to prove that you can start burning 500k a month with a positive ROI after you were burning not more than 50k a month. We’d expect some growth but it should be more gradual.

4. Milestones vs Round size sanity check

If it’s a Series A deal which is, in most cases, all about scaling the business, we expect that every dollar invested into the company will generate at least one dollar in new ARR, i.e if you are currently at $2M ARR and planning to raise $5M for scaling the business, we’d like to see a company reaching at least $6-7M ARR before the next round, so the cash conversion score is close to 1x (applicable to Series A, at the seed stage, it could be 0.5-0.8x due to higher product development investment requirements), which assuming a standard Series A runway of 18-24M is not a very aggressive target (2 consecutive years of 100% YoY growth). 

All of this leads us to define the round size, which in most cases doesn’t significantly deviate from the industry standards. Average round size in CEE markets tends to be at the lower end of the spectrum of the European market possibilities. The average European Seed round size starts from $0,5М and goes up to $4M (comparing to $0.5-2M in CEE) and Series A round being in the range of $4М to $15M (while $4-6M in CEE). This is approximately 10-25% lower than what you can potentially get in the USA, but it comes with strings attached: severe competition and expensive talent pool.

VC’s are also using the amount that a company is raising as a proxy to the company’s valuation, which is a function of the round size and a resulting dilution from the round. The dilution from raising money from institutional investor could be anywhere from 10% and sometimes up to 30-40%, but in general companies, these days tend to sell around 10-20% at seed stage and 15-30% at Series A. So, if you are raising $2M seed round, a VC can assume that a company expects a pre-money valuation of $8-11M, which is more or less standard seed stage pre-money valuation these days. However, VCs are also expecting some level of traction to justify this valuation, but that’s a topic for another time.

It’s worth mentioning that every rule has its exceptions and there is a growing number of supergiant seed rounds happening now not only in the US and Western Europe but also in CEE. By supergiant seed rounds we mean a round size of over $5M (for example seed round of €5.6M), same applies to mega-Series A deals which can be defined anywhere from $15-30M (for example Tier Mobility Series A of $25M). The number of such rounds is steadily growing and it’s mainly driven by:

a) maturity of the ecosystem and as a result of a bigger number of high profile serial entrepreneurs 

b) hot and/or capital-intensive industries (mobility, some verticals of fintech industry).

Raising your first institutional financing round is only the start of the journey, but only a few companies make it to the next round. Having clear and achievable milestones synchronized with the round size, not overshooting on your Seed/Series A and controlling the founding team dilution - are the lessons that lots of founders still need to learn.


Related Posts:

VC Tips For Successfull Startup Fundraising (by Magdalena Balcerzak, Manager, Vestbee)

How To Create A Pitch Deck That Will Get Your Startup Funded (by Ewa Chronowska, Partner, Next Road Ventures)

How To Write Elevator Pitch For Investors (by Ewa Chronowska, Partner, Next Road Ventures)


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