Here are a few observations from my latest interactions and my humble tips as a former founder (and with experience as a current investor).

1-) Do not try to raise a larger amount than you need:

The critical point about the above issue is “the amount you need.” Some of the feedback the founders have gotten lately, and these points are entirely valid.  

Times are tough; raise as much as you can. That makes sense, but this was a bit of better advice last year, not anymore. The seed level has been tough to raise for several months, especially as investors want to keep dry powder to support their Series A and beyond the portfolio. For the seed level, they want to see either significant momentum that shows a feasible path to Series A, signs of a survivable company that can bootstrap if needed, or want to get a great deal with the valuation on a good company. And in none of those cases, it is favorable for the founders from a dilution perspective.

Raise funding as much as possible so you can focus on your business and not have to raise funding for a long time. As a former founder, this makes so much sense to me since the least favorite thing for any founder in building a business (except those that make raising funding their actual business) is to look for investors. Yet when you raise funding, you have to consider the impact of dilution on your existing shareholders (including yourself). Generally, after your seed funding, you expect to have 12-18 months of runway to reach your next set of milestones and significant inflection points. You don’t have to get to the position of Series A, but get to a point where getting the Series A (or not) will be predictable, and you will have a solid plan. 

2-) Your seed valuation is not a goal but a tool. 

Unfortunately, it is a common mistake for many founders to get stuck on the seed funding valuation. Don’t get me wrong, valuation at the seed level is important, but there are other important things. Your Seed Level is a tool to get to Series A, and get there strong. It is not a goal itself. 

By getting stuck on the valuation, you might be trading off several essential things, like closing your seed level fast and with more than one potential lead investor competing for the opportunity. 

As founders, potentially the most significant dilution + exit liquidity decrease happens at the Series A level. Most founders do not realize that during Series A, Venture Capital firms use various tools such as “liquidation preference” (Founders, if you don’t know what this term is, please research the Venture Capital terms and what they mean). So use your seed level funding round for what it is as the best way to get to your next step Series A. Do not do anything that could put you at a disadvantage with your Series A

With seed, getting the best strategic investors (venture capital or angel investor) should be your primary goal. Instead of having to work with investors that will accept your valuation at a higher level, have investors compete for your great valuation so you can choose the ones that will serve your purpose. Don’t forget, just like promising founders and companies, good investors have options too. Unless seed is the last round you will be raising, you are using the seed level to get to your next stop strong. 

3-) The amount you raise and the valuation you seek are interrelated.

This relation is not a general rule but a best practice to keep in mind. You are doing what you are doing as a founder because you expect to be successful. And more likely than not, you will need to at least raise a Series A (or Series B) before you exit. That means you will have to go through at least three or even four rounds. 

This Finerva article summarizes very informative research done by Radicle mining data from 8000 funding rounds and outlines how much dilution generally takes place at each funding round. In summary, averages look like these:

Pre-Seed 10-15%

Seed 10-15%

Series A 20-25%

Series B 15-20%

Series C 12-15%

So if a founder team finds themselves trying to raise $3mil on a $7mil pre-money valuation at the seed round, they may be diluting themselves too much. They should have a very good reason for doing what they are doing. 

I can add more points and tips to these observations, but the above takes care of the most important ones. 

So seed level company founders, please think with the long term in mind. If you are going to succeed, you probably have at least five more years to exit and are going to raise at least two more rounds after this. 

The post Founder Tips for Seed Round Size and Valuation Determination for Raising Funding in 2022 appeared first on Cross Ocean Ventures.

Angel investors are often your first investors. Their investments may be as small as $25,000 or as large as $200,000, but they are essential to the success of a young company. In addition, once a business receives an angel investment, it is easier to convince others of the value of the business and then convince them to invest as well.

Angel investors know that startups have a high failure rate. Nearly one in five U.S. businesses fail within the first year, according to the latest data from the U.S. Bureau of Labor Statistics (BLS). In the end, an angel investor must be confident that the potential upside/rewards of investing outweigh the downside risks. Before investing in a startup, angel investors review several vital issues and conduct due diligence. Below are the top five things angel investors look for before deciding whether to invest in a startup:

1. Founder/management team: The management team behind a startup is often considered more important than the idea or product. Investors want to know that the team has the skills, drive, experience and temperament necessary to grow the business. The investor must decide whether the founder and team will be enjoyable to work with. How confident is the investor in the team? Does the CEO have experience, and is he/she willing to listen? How trustworthy is the CEO? Involving experienced advisors can also be very beneficial in the early stages to help bridge an early-stage team that is still growing.

Along with showing commitment to the company and the ability to bring value, investors want to see smooth and risk-free interaction among members of the startup team, to ensure long-term success.

2. Business potential and return: Angel investors are looking for businesses that are scalable and able to grow. Make sure you explain upfront why your business has the potential to be significant. Avoid small ideas. Investors will want to know how much of the addressable market you plan to capture over time. The investor must believe that the opportunity has a clear value proposition, there is a large and growing market (TAM, Total Addressable Market), that your solution is unique, the time to build it is now, that you and your team are the ones who can build it, and that you will make lots of money doing it. A good rule of thumb is the 7-to-1 rule: a seven (after-tax) dollar return for every dollar of capital an angel investor invests within seven years.

 3. What makes your product/ service great? Angel investors aren’t afraid to invest in high-risk ventures as long as they believe the idea is excellent. First, demonstrate your product’s uniqueness. Having an Minimum Viable Product (MVP) is important when pitching to angels — or at least a very good framework of what it will look like once you use the funding to build it. Describe the unique problems it solves and why users care about it. Is it a game-changing piece of technology? And what makes it stand out?

 4. Positive early momentum: Angel investors are looking for early signs of traction or customers. Companies that have achieved early traction will likely be able to obtain better terms with investors. In addition, investors will probably ask how early traction can be accelerated. Is there a particular reason for the traction? Could this traction be scaled?

 5. A viable exit strategy: Making sure you have a variety of sound exit strategies can help mitigate their risk and forecast how they will be paid out. Regardless of the venture’s success or failure, an exit strategy provides the investor with security. They should be informed of when they can expect returns, and more importantly, how they can minimize their losses.Angels do not want to invest in companies that cannot guarantee returns. As Allan Riding, Professor at Carleton University, put it, “For every dollar that an angel puts into a company, he or she would like to take seven dollars out, after taxes, in seven years.”

Even though almost every angel investor will consider the above factors at least partially, you must also realize that each angel investor will be unique — they will all have different goals, values and priorities. Angel investors may find something that appeals attractive to one but may turn off another. A financial plan that appeals to one may seem overly ambitious to another. Therefore, while you can optimize your business to be as appealing as possible, you should also prioritize finding the right fit.

The post 5 Things Angel Investors Want to Know Before Investing in Your Startup appeared first on Cross Ocean Ventures.