If you’re a newbie founder building your startup, fundraising might sound intimidating to you. Although there are exceptions, most startups fall in a broad valuation range in the early stages. As a young founder, you don't know these ranges. Everyone you speak to tells you a different number. But startup valuation and dilution have some thumb rules.
One big dilemma you might face when you are raising capital for the first time is how much money you should ask for from investors. While more is better than less, you are not going to get $10M even if you ask for it. You have to be realistic about it.
A good rule of thumb is to raise money for the next 18 months. When you are raising pre-seed or seed capital, you must do a detailed expense estimate for the next 3 years. The goal should be to launch an MVP (Minimum Viable Product) within 12 months, preferably earlier. Thus, the capital you are raising should be enough to build and launch this MVP and acquire a few paying customers.
Once you've built the MVP, you can again go out into the market to raise more capital for sales and marketing efforts. But step one is to build an MVP and acquire a few paying customers. This gives a lot of validation to investors.
How much money do you need to build an MVP in India in 2023?
It depends on the salary you pay yourself and your team. The other costs (server, technology, infra, etc.) are not too much at this stage. If you are two co-founders who understand the technology, you don't need a large team to build an MVP. A couple of young engineers are all you need.
Although first rounds were called seed rounds in the past, pre-seed rounds are in vogue. Experienced founders started calling their first round pre-seed, and everyone followed suit. You raise pre-seed money from your friends, family members, colleagues, and acquaintances to build and launch an MVP. Some lucky founders also raise their pre-seed round from super angels, angel networks, and seed funds
What are the valuation ranges in India in 2023?
Pre-seed: While the pre-seed rounds have a large range in India if you are a first-time founder raising money at a concept stage to build an MVP, you should target Rs 2 to 3 Cr (USD 250K to 400K). You don't need more money to launch an MVP and acquire your first set of customers. You also won't get it. This is true for most software businesses. If you are building a semiconductor or an LLM company, even $20 M might not suffice. So, the answer to the question How much Capital to Raise in Your First Round? is it depends on what you are building. But here are some ballpark ranges for first-time founders building a tech product.
Pre-money Valuation: ₹15-20 Cr
Round size: ₹2-3 Cr
Dilution: 10-15%
You should never dilute more than 15% of the company at the pre-seed stage. 10% dilution is ideal. A Rs 2-3 Cr raise and 10-15% dilution translates to a valuation of Rs 15 to 20 Cr. This is a good range to target for most early-stage tech startups in India.
If both you and your investors are unsure about the valuation and can't agree on a number, you can do an unpriced round using a CCD or a SAFE note where you link the valuation of this round to your next round. Unpriced rounds are becoming more common in India in the early stages (pre-seed and seed).
Seed: The purpose of the seed round is to quickly test the MVP and acquire the first cohort of paying customers. The goal is to find early signs of PMF (Product Market Fit) and tweak the basic product after feedback from your first customers.
Pre-money Valuation: ₹25-50 Cr
Round size: ₹3-10 Cr
Dilution: 10-15%
Pre-Series A: In an earlier era, startups would go on to raise a Series A round once they had some PMF and significant monthly revenue. But now, raising a pre-Series A round has become common.
The purpose of Pre-Series A (also called post-seed) capital is to acquire enough customers to reach around Rs 1 Cr ($100-125K) monthly revenue so that you’re ready for growth capital in a Series A round.
Pre-money Valuation: ₹40-100 Cr
Round size: ₹8-15 Cr
Dilution: 10-15%
Series A: Once you see strong signs of PMF, it’s time to raise substantial capital to add more product features and double down on growth.
Pre-money Valuation: ₹100-300 Cr
Round size: ₹25-80 Cr
Dilution: 15-25%
This money should be enough to build a profitable business. However, most startups continue to raise more capital after Series A because founders think they can grow quickly. Sometimes they are right, sometimes wrong.
The purpose of the Series A capital should be clear from the beginning.
1. You become a profitable company that can grow relatively quickly (20% every year) for the next few years. The ultimate goal is to sell it to a larger competitor.
2. If the TAM is increasing rapidly in a fast-changing business landscape, you raise more and more capital to target exponential growth. VCs love such companies because they give them 50-100x returns. The goal here is to hit a $250-500M valuation, become a unicorn and do an IPO if you are lucky.
Most startups raise their Series A round within five years of starting. By the time founders raise their Series A, they broadly know the potential of the business. If competition is intense and growth sluggish, you use the Series A money to build something you can sell for a respectable sum.
If the growth seems exponential, you continue to raise capital to capture an ever-larger market share. The sky is your limit.