Funding life… a raw story about Seed Series A-B-C
Funding series Seed, A- B- and more…
Over the last 6 months my company, VioScore, has been on a rollercoaster. Started in December we closed two rounds of funding and they both didn’t come through completely.. Our valuation had sky rocketed and then fell down (we are in Fintech). Being an entrepreneur is, in a way, too often seen as being “sexy” or cool.
But not a lot of people see the other side. The passion that goes into this, the drive, the motivation to keep your company running the first month, 6 months, a decade. I sent this with my company and my others. It takes tremendous guts and vulnerability to build a company in 2022.
One of the biggest things I have learned over the last months is that team is key – and asking for help when needed is crucial.
Asking for help can be one of the hardest things for an entrepreneur to do, but it is so necessary to avoid burning out. I was swamped, working 70 hour weeks, but the company is mine. We attracted the best talent as we are going to change the world. I care for it, am passionate about it, and truth be told, may be afraid of losing it if I don’t work ‘hard enough’. We were told to get 2 million in after three months, and after the first cheque was in the rest never came. To build your expansion plan and then see it ripped to pieces, and then again…
Friends and family can tell you that you are working too hard and you need to put the brakes on – “Take a holiday! Take a break!" But this is easier said than done. I let it slip between my private life and work. But we are working on our first client, and the days roll on, and the 70 hour weeks continue. Something’s got to give.
We know this feeling. We’ve been there. So we thought we’d share some quotes from three successful people in the hope that it will re-frame your approach to asking for help, and understand that it really is a strength, not a weakness.
Where to raise?
Is it better to raise your startup’s seed round from only angel investors, or is it better to include a VC or two? We have experienced all. HN individuals, VC’s, etc. We had valuation reports built by a big four, and still people didn’t conclude.
Was it me? Is it the CEO’s fault? Ultimately it is, but that is also harsh. So let’s bring it down to numbers.
To start with this a very interesting list below ( source Tomasz Tunguz )
This data surfaces three observations:
Startups with at least one VC in their seed round raise Series As 64% more often than angel-backed startups do. I can’t prove causation, i.e., that having a VC involved is the cause of this increase because of the limitations of the data. But I believe the next observation sheds some light onto this trend.
VC-backed seed rounds are 23% larger on average, which is statistically significant to greater than 99% confidence. This makes sense. VCs typically invest from larger funds and are more willing to invest more dollars in seed rounds. And, we’ve previously shown that larger seed rounds correlate to higher follow on rates for Series As. A longer runway enables startups to experiment more, and ideally become larger, more attractive investments for Series A investors.
Curiously, there is no statistically significant difference in the size of Series A rounds between the two categories of startups. Successful angel-seeded companies raise just as much money as VC-seeded companies. In other words, a great entrepreneur can come from anywhere. To further prove the point, I’ve charted the distributions of Series As below. Angel seeds are in blue and VC seeds are in red. They are, in fact, identical.
But we also heard, “your too big” and “you’re too small”. Not enough traction. So VC’s are great, but very KPI driven. Before going there you need to have your KPI’s in order. It is like dating. What is right? You can’t have it all. It needs to have some compromises. There are numerous other factors in this game take you need to take into consideration. Let’s look at our own case…
How did we analyze our own valuation?
Milestones analysis of VioScore (My Life Kit)
To become eligible for Venture Capital funding, MLK needs to show the technical viability, commercial potential of its products, and the organisational maturity and readiness to support the growth.
Outcome overview
Based on the valuation analysis presented previously, we have seen that MLK has been able to increase its probability of success between February and June 2022 despite a drop in the revenue exit multiple (from 6.3x to 5.1x). MLK’s activities during this period and milestones achieved are presented in the timeline displayed below. These factors appear to have had a positive impact on the perception of investors as to the probability of MLK to generate returns commensurate with their expect.
What was the outcome?
Putting things in perspective, i.e. what can we infer from the analysis:
MLK’s implied IRR and probabilities of successfully realising the forecast exactly as planned and realising the forecasted returns from previous funding rounds are in line with the generally observed rates in the market for start-ups at this stage of development (please see Appendix 2 and 3).
The achievement of certain milestones between February and June 2022 has had a positive impact on the perception of investors as to the probability of MLK to generate returns commensurate with their expectations.
Based on a benchmarking with typical VC rates of return of between 70%-100% (see Appendix 2), MLK should become attractive to professional VC funds as of September 2022 at targeted valuation of $35m-$70m.
In order to achieve the target valuation as per September 2022, and hence the expected returns from investors, MLK needs to increase the perception of its ability to deliver on its plans and align itself closer to the typical profile of a successful Series A start-up (see table below).
So, we sent this out to at least 100 people and now have a term sheet on the table. Finally. Our valuation has dipped a bit, but we are still alive. Next, we will adjust the plan, get more traction and then start again with fundraising.
It’s a never-ending game. Never. Ending.
I praise the founders and business owners in the world. Form the one man shows to Elon Musk. We all have struggles and I really can only take my hat off to people who dare to follow their dream.
Romano