OK let’s say you’re ready for a Metrics Raise. Take a big step back, and consider the dynamics of both the present and future.
Part 1: Estimate Your Current Valuation
First, take your current metrics. Determine your current multiple, at somewhere between 4 and 8, where 4 = non-sticky, transactional revenue and 8 = high net retention, sticky recurring revenue. Plot them into the PCG calculator. That is your starting point for a premoney valuation. If you have a fair bit of cash in the bank, add that in to the premoney valuation figure, since enterprise value should always be considered on an ex-cash basis.
For example, if you have $2.5M in ARR at 80% gross margin, doubling every year, with a 6x multiple, then you justify a $48M premoney valuation. If you have $7M of cash in the bank, you can justify $55M premoney. So perhaps you’ll want to raise $10M at $55M premoney ($65M postmoney).
If that feels low, it’s because we’re in a “tight” market… you’re probably anchored on a “fair” or “inflated” market. Those same metrics? In a fair market would command $96M, and in an inflated market might have even commanded a $180-200M valuation.
Market commentators are hoping that later this year, once market uncertainty settles down, things will improve a little. In our PCG calculator’s parlance, that would imply that things would revert to a “fair” market. One can hope… but keep in mind that this would require at least a few of the contributing factors (geopolitics, inflation, fed rate increases, stock market volatility, and supply chain issues) subside. So when you consider fundraising, that scenario is good to hope for… but it’s not the most likely scenario to plan for.
Part 2: Estimate What you Can Grow into, in 12-18 Months
Second, think about your projected metrics when you’ll want to consider or close your next round — probably ~12-18 months out. Add a wide margin of safety; be conservative in these numbers, and pick metrics that you’re sure beyond reasonable doubt that you can hit. Something that you would only fail at if basically everything goes wrong. Plot a multiple between 4 and 8, again. Assume that we’re either in a “tight” market or a “fair” market in the estimator. The “tight” market figure should be 2x your raise today, and the “fair” market figure should be 3x (or better) than your raise today.
Why? When you raise money from a VC you are implicitly promising — whether you realize it or not — that, all things equal (i.e., if market conditions are the same) “I expect to double or triple your money in the next ~year”.
In a comparable (tight) market, you have to be confident you can double their money (and explain why, based on projected metrics and the valuation that would go with it). If you can’t do so, reset your expectations of where you want to raise today.
👉 In summary, you have to be sure that your valuation makes sense in both the context of today and the next raise, so that you can always deliver on your implied promises.
Access all parts of our Startup Valuations & Fundraising: Summer 2022 series below:
Part 2: The Flavors of Fundraising