Are you trying to decide if your startup is ready for an early-stage fund raise?
Are you a startup planning to raise your first round of equity funds from angel investors or venture capitalists and are wondering what are some of the parameters that investors consider in early stage rounds?
Are you confused if you should first raise seed funds or jump straight to a Series A round?
Do not worry, we got you covered with this article! We are going to explore different funding rounds from Pre-Seed to Series A and understand what investors’ typically look at while investing in each round and how you can decide if you are ready for a fundraise or not.
Pre-seed round: Getting operations off the ground
This is the stage where you have an amazing idea that you want to base your business on, but do not have required money to kick-start your operations. Both money and time investment are necessary before you can go commercial – this is typically known as pre-operating expenses. Startups usually raise anywhere between USD 10,000 to USD 100,000 from Founders (own investment) and friends and family.
Typically, the business at this stage will have no metrics to lean on, and investment decisions are made based on the quality of the Founding team and their vision. Here, investors invest in a person or a set of people they believe in. Founders with a combination of one or more of the following characteristics are more likely to be able to raise funds in this round:
Charismatic personality (someone with passion and drive, a hustler who can make things happen)
Sound track record and experience (previously worked in companies or businesses and had an impact)
Strong alumni network (example: a Harvard graduate starting off from scratch with his new business idea)
Seed round: Assistance towards product development and market research
After you have a clear idea about what you want, the next step is to build a product prototype and understand whether there is a market need for it and how you can differentiate your product offering. Typical fund sizes you can expect for R&D ranges between USD 10,000 to USD 2 million, depending on what your product exactly is. For instance, if you are making a state-of-the-art technology application to break plastic waste and recycle it, it would warrant higher R&D investment than a company looking at getting into a retail business of selling coffee pods.
Investors in this round comprises of angel investors, accelerators and very early-stage VCs. Some of the metrics they typically look at include:
Idea or concept
Founding team credentials and background
Proof of concept
Strength of relationships
Product roll-out/sales strategy (go-to-market strategy)
Competitive landscape and competitive advantage
Series A round: Looking beyond great ideas to companies with a strong strategy and money-making potential
At this stage, you should be generating revenue, or have a proven revenue model in place that will generate income for the business in the coming months. Investment sizes range from USD 2 million to as high as USD 15 million.
Early stage VC firms typically invest in this round and look at all seed funding metrics plus the startup should have several quantifiable KPIs and should be able to demonstrate significant growth in each of them. Focus here is on user/customer metrics as well as financial metrics.
For instance, if you are a food delivery aggregator platform, some of the user metrics that you would have to monitor include:
Total number of platform downloads/registrations
Monthly/weekly/daily active users (MAU/WAU/DAU)
Churn rate of users
User retention rate
Cost per acquisition
User growth rate (MoM/QoQ)
At this stage, VCs also look into certain financial metrics such as:
Annual recurring revenue/monthly recurring revenue (ARR/MRR)
Net burn rate (cash)
Revenue growth (MoM/QoQ)
Lifetime Value/Customer Acquisition cost (LTV/CAC)
Depending on how ready you are, you can either start from a pre-seed round or jump straight into a Series A round. The fund-raising journey is different for different startups, but always remember that you should build strong credentials before going to investors during early stage rounds so that you do not end up giving up a huge chunk of your business at lower valuations.
At Falak we engage in end-to-end deal making where we are involved in every aspect of the deal from the due diligence to the valuation, to drafting of necessary agreements and structuring.