My name is Ashank, a co-founder of ShapeCI and I am by no means an expert on fundraising, but as a 20-year old first-time founder, here’s a little bit about what I learned in my journey founding.
To give you some insight into myself, I am a dropout undergrad from UIUC where I was studying mechanical engineering and computer science. It took a lot of shitty ideas and some failure founding to get to where we are with www.shape.ci . We are a bottom-up (team as opposed to enterprise) B2B (business-to-business) SaaS (software as a service) company on a mission to accelerate the development of the things that matter.
Financial Jargon
Equity: The ****percentage of the company that is owned by an individual or institution.
Valuation: How much money the company is worth.
Round: A group of capital investments given to the company in exchange for equity converted now or in the future. A round is usually priced meaning it is assigned a valuation.
Valuation Cap: Money that is given now will convert to equity at the specified valuation at the time of raising your next round (if the valuation is higher than initially specified).
Discount: Money that is given now will convert to equity at a discount of this percentage at the time of raising your next round.
MFN: A clause called the Most-Favorable-Nation. This is a clause appended onto fund “offers” or notes that means that the money will convert to equity at the most-favorable terms (i.e. lowest valuation) at the time of raising your next round or in between raising a future round and the time of signing. Basically, the investor with an MFN gets to change their terms to be equal with the best existing offer in the same round.
Convertible Note: A check from which money from an angel/fund will convert to equity in the next round at some favorable terms meaning a valuation cap, discount, or MFN. This note will not assign your company a valuation at this stage.
SAFE Note: A SAFE note is just a simpler convertible note. This is commonly used for quick/small deals and was made by Y-Combinator. Also has a valuation cap, discount, or MFN clause appended to it. Like a convertible note, this does not price your round.
Post-Money Valuation (post): The valuation of the company after an investment.
Pre-Money Valuation (pre): The valuation of the company before an investment.
ARR: Annual Recurring Revenue or how much revenue your company does in a year
QRR: Quarterly Recurring Revenue or how much revenue your company does in a quarter
Pricing Your Round
Pricing your round is confusing. Keep in mind these are numbers relevant for a company in our space (SaaS) but can probably be generalized for other types of companies as well. For deep-tech startups i.e. space and autonomy, the nature is a little different so caps and check sizes are probably a little bit higher.
How much money should I raise?
This is a question that I had a hard time answering, but in hindsight, it’s not super difficult to decide. Just one piece of general advice I will give is that, when raising in the early stages (angel or small pre-seeds), it’s important to keep your piece of the pie (preserving equity), but make sure you’re getting enough money to go to market as soon as you possibly can. That’s the real game here. Also, you shouldn’t really be optimizing for valuation at this point. Check sizes are small, and fighting for a difference of 1% equity dilution isn’t going to make or break your company. Just make sure you’re picking investors that you actually like, who aren’t taking up board seats so early on and aren’t breathing down your neck for weekly lunches and other random shit. The most important thing, in my opinion, is to get plugged into the right communities as early on as possible.
That being said, here is a pretty simple formula that I would use to figure this out for an early-stage startup to get to the next round.
total salary: (# of product hires x avg. monthly salary) + (# of engineering hires x avg. monthly salary) **+ **(# of founders x subsidized avg. monthly salary)
tooling: $25,000 — $50,000
runway: time until raising the next round
rainy day buffer: 25% in case shit goes wrong
fundraising amount = ((total salary x runway) + tooling) * (100 + buffer)/(100)
Also to be completely honest, this is not something that we were super good about abiding by, but something I have seen that is general advice that I was told from successful early-stage founders and a couple of VC firms I have spoken to. We were originally going to raise a $150,000 angel round but decided to take on more money to get plugged in with the right communities for pilot customers. Be cognizant of the fact that value is not just held in money and valuation, but in other intangibles as well.
As for what you want to call your round, here is a quick introduction to what that looks like from a check size, valuation, key milestone, and time standpoint.
Angel
Check Sizes: $100,000 — $500,000 checks @ $1,000,000 — $5,000,000 valuation post
Key Milestones: None
When: Good user research/validation, customer discovery, and solid demo
Angel rounds are, by nature, vague. There are quite literally no key milestones to be considered for an angel round, but let me give you a couple of examples to explain the ranges that you might find.
A founder who has previously exited and is working on an idea with no product, no customer discovery, no customers, no revenue, but good experience in the target industry is in the lower bracket of being able to raise an angel round of a $100,000 check @ $1,000,000 valuation post.
We were first-time founders, with a solid demo, 50+ customer interviews, 2 ”intent-to-purchase”, identified a problem within our past experiences, but with no product and no revenue found ourselves on the higher end of the spectrum.
Pre-seed
Check Sizes: $1,500,000 — $3,000,000 checks @ $10,000,000 — $15,000,000 valuation post
Key Milestones: 1–5, paid or unpaid pilot customers
When: ASAP. As soon as you have a couple of pilot customers and have done some product iteration, you should look to grow and scale immediately, therefore you should fundraise ASAP. Our estimate is 6-months after closing your angel round which is the minimum it would take (for us at the very least) to build, pilot, and iterate. Having the pilot customers will be useful for funds to converse with to validate your product instead of doing due diligence that doesn’t necessarily speak to the actual product itself.
Seed
Check Sizes: No idea
Key Milestones: $250,000 ARR
When: This usually happens 1 year after your pre-seed. ****Hitting key milestones here is important, but don’t take the 250k literally. What investors also really want to see is the rate of growth, so if your startup is doing numbers then you can probably get away with raising money earlier than anticipated. Just make sure you’re not raising too quickly and that your valuation doesn’t get dinged.
Series A
Check Sizes: No idea
Key Milestones: $1,000,000 ARR
When: This is supposed to happen 12–18 months after your seed, but, generally, hitting the financial milestone here is essential.
Beyond
I have absolutely no clue. Hopefully, I get there one day.
Pitching
This is probably the most cliche thing you have heard, but in the early stages, the only thing that matters more than the product is the founders. To be clear though, it is not just about how cool or how smart you are, but your ability to story-tell. First and foremost, tell your story. If you are able to tie in your life and background with how you identified a problem, proposed a solution, validated the proposition, and constructed a solid product around everything, then you are set. Make sure they get to know who you are, not just what. These are people you will likely be working with for the next 10 years so spend some quality time on this,
After you’ve told your story and talked about the problem, solution, and product, there are two things that can really help boost your case and ultimately valuation: a demo and economics.
A good demo is invaluable. For a first-time founder without a degree and no full-time work experience, it is impossible for an investor to know if I am technically apt or not, so the only way to prove it to them is to show them. A good demo is everything, so make sure you put in the effort to build something that accurately portrays your product. This is by no means an MVP that you can ship off and make money off of, but more as a way to put your story into a more interpretable and visual form.
Apart from building out a good demo, it is important to look at the economics. As a technical founder, I feel that economics is not nearly as fun as building, but you need the investors to trust that you know how to run a business. Spending time doing real research into the market size and opportunity will help establish a little bit more trust on that front and if you are building a company that is either SaaS or subscription-based, doing some unit economics could be super helpful.
The golden number for SaaS performance is in the (Customer Life Value)/(Customer Acquisition Cost) ratio. From talking to other people, a CLV/CAC ratio of 3 is considered good performance for a company, but the higher the better. For our unit economics slide, most of the numbers are estimates but doing customer discovery and user research early on was integral to this process. With this data, we were able to show investors that we did some thinking as opposed to just throwing out an estimated ARR of $2,000,000,000 10 years into the future (we seriously put this in our slide deck at one point).
Since I am basically just laying out our pitch deck structure at this point, I might as well tell you how we closed out our pitch. We did some pretty heavy research into the competitive landscape, wrote a slide about our top-3 competitors, and then finally transitioned into round pricing. We briefly introduced how much we wanted to raise, at what valuation, and how funds would be allocated, but more importantly we brought that information into our final slide: A Year into the Future. It’s important to define key product milestones and company milestones i.e. when is the MVP done?, when are you piloting?, when are you going to raise again? (implies runway), when are you launching?, etc. to make sure that you and your investors are thinking about the future.
At the end of the day, you’re not just building something, you’re starting a company. I know I laid out a lot of things about pitching, but my main takeaway is to spend time.
- Spend time telling your story
- Spend time building a good demo
- Spend time thinking about the product, the milestones, and the future
- Spend time doing the economics. You’re not building a product, you’re building a company
