Why Your Valuation Matters
Just because you can raise the money, doesn't mean it's the best decision for your business.
When founders are first starting out, they sometimes believe it is best to raise as much capital as they can at as high of a valuation as possible. This buys them time and resources to hopefully find PMF. These days, we see seed rounds that range from $1.5M all the way up to hundreds of millions. What founders should keep in mind when they take this money is the revenue expectations that are already baked in. For example, if you raise at a $25M valuation and average SaaS revenue multiples over the long term are 10x, then that assumes you can get to $2.5M in ARR and exceed that to raise at a higher valuation for the next round. If you raise at a $500M valuation (regardless of stage) that means you need to reach $50M in ARR to grow into that valuation.
Note: These revenue multiples might vary from 1x all the way through to 20x (or more!) based on the growth rate of the company, the stage, and the unit economics of the business, but 10x is a reasonable average. For very fast growing businesses, investors are often willing to give higher multiples.
While raising more capital might seem like the smart thing to do if you can do it, it can heavily reduce the optionality for your business going forward. It also can promote the wrong behavior internally.
At an event I recently ran, a founder who has raised several million dollars and ended up hard pivoting his company had some tips for founders who raise.
Ignore the money - Pretend like you don’t have the money. Just because it’s there doesn’t mean you need to spend it.
Stay small - Keep the team as small as possible for as long as possible. With a team of 4, as an example, everyone can be in the same room and less time is wasted communicating among and across team members.
Find reasons to throw away ideas - If you’re in the ideation phase or pre-PMF, try to disqualify ideas as quickly as possible. You need to find an urgent problem that the potential customers are thinking about every day & could have catastrophic effects if not solved.
Charge enough - You should be charging just under what customers think is an offensively high amount.
Companies are now shutting down each day that have raised Series As, Bs, and beyond as the amount of capital they have raised and their valuation is not aligned with the traction of the business. As a former founder who has raised a significant amount of capital, I try to help other founders be much more successful than I was. Be careful out there!