Series Funding Vs Valuation - How Do They Correlate?

Although some organizations, typically those in the technology sector, have been able to expand entirely through internal means, the vast majority of those that have been successful have required at least one round of external capital to get to where they are now. Industry professionals typically predict that founders will sell between 20% and 35% of the organization during series A.?

This may seem like a simple idea at first, but raising money, appraising various forms of capital, comparing your present and projected valuation, creating equity ownership pools, issuing advisory shares, and determining vesting dates may quickly complicate things. This article will shed some light on the individual characteristics of series funding and valuation and explain how they correlate in helping startups reach their milestones.?

What is Series Funding?

Series Funding is the initial financing round that a business receives from investors other than the company's founders. These outside parties will desire a stake in the firm in exchange for providing financing. This capital is the pre-money valuation, which is established by the investors.?

In 2020, pre-money valuation seed rounds averaged $6 million. While raising seed capital, most entrepreneurs will offer a minimum of 10% of their company. Less stock will be given up by startups that have yet to generate revenue or gain customers.

After receiving their initial seed money, firms may either succeed or fail and stop receiving funding. By selling off a portion of their company's shares, startups can quickly acquire capital.

How Does Funding Work In a StartUp?

Finding out which parties are involved in a financing round is the first step in understanding how it all works. The first type consists of people seeking financial backing for a business idea. It is normal for a firm to go from a seed round to an A round, B round, and finally a C round as it grows and develops. The opposite side consists of possible financiers. Investors want firms to flourish because they value entrepreneurship and support the companies' missions, but they also expect a financial return on their investments. The investor will receive a return on their money that is proportional to the success of the business.?

The economic mechanism that supports series funding is unique. Investment opportunities are typically evaluated by conventional funding sources based on characteristics such as net profit and market circumstances. Angel investors, startup accelerators, and VCs typically care more about the founder's track record, the strength of the personnel, as well as the potential size of the market. Series A investors are more risk tolerant than conventional private equity companies, despite the fact that income and expansion are still crucial.

What is the Role of Valuation?

An asset or company's value is calculated by a methodical analysis of its present and future market conditions. The process of valuing something might involve a wide variety of methods. When determining a company's worth, analysts take into account a number of factors, including managerial quality, capital structure, expected profits growth, and asset market value.?

The market capitalization of a firm is a popular illustration of a valuation. This is calculated by multiplying the current stock price by the number of outstanding shares of a given firm. If a business's share price is $5 and it has 2,000,000 outstanding shares, its market capitalization is $10,000,000.

Correlation of Series Funding and Valuation

To put it simply, a company valuation is an estimate of your business's worth. Yet, the parameters of your firm aren't the only thing that goes into the valuation. A founder's history, funding requirements, the company's potential for development, and the values of similar businesses all play a role. As valuations and valuation limits can have a significant impact on the extent to which you are diluted, they are very essential. Finding the appropriate fundraising goal or valuation is difficult. But, conventional wisdom is that you should calculate how much money you'll need to raise in order to reach your goals while keeping your ownership stake constant, and then adhere to its number.?

Startup Funding and Valuation - Example

Your company's stock price is based on an evaluation of the company's value and a ceiling on that value. As a founder, your dilution is often proportional to the sum of the funds you obtain and the value you establish. This implies that the series of funding rounds play a crucial role in the valuation of a startup.

For instance, if a business is seeking $4 million in funding and the investors need a 25% stake in exchange for their investment, the company's paper value is $16 million. One essential qualifier should be made, though. It's important for founders to know that they'll have to give up 20-30% of the firm with each investment round. Hence, if you fail to correctly estimate your funding needs and fail to achieve suitable business milestones, you may end up needing more fundraising rounds than expected, leaving you and your investors vulnerable to dilution.

Setting a range of possible valuations, with some wiggle space for negotiations with investors, is a common practice when seeking financing. Your target value (or valuation cap) should allow you to get sufficient funding to accomplish your objectives while retaining an acceptable level of equity.

Summing up

With the help of series funding, investors may help entrepreneurs receive the money they need to pursue their visions, with the hope of benefiting from the eventual IPO's financial rewards. However, determining how much capital your business needs is a difficult and, at worst, perplexing task. If entrepreneurs acquire excessive money, they risk over-diluting themselves, but if they acquire too little, they risk not having the resources to raise their next round effectively.