How much should you raise and at which valuation ratio?
In the Web3 space, the common practice for a project's valuation is to raise with a 1/10 investment ratio. The market cap before mainnet launch is mostly superficial and depends on the team quality, traction, and market conditions. When considering a valuation, start with the amount needed for a specific runway (1-2 years, for example) and use that as a starting point.
What are Common Valuations in the Pre-Seed, Seed, and Series A/Treasury Rounds?
Here's a simplified breakdown of common practices for raising funds in pre-seed, seed, and Series A/Treasury rounds:
Example Raise & Valuations
500K on 5M up to 1M on 10M
1.5M on 15M, 3M on 30M, etc.
10M on 100M, 20M on 200M
In general, most projects raise around 10% of their valuation.
What’s the Expected Fundraising Timeline?
Closing a funding round can take anywhere between 2 to 6 months, with 2 months being very optimistic. The time it takes to close a round also depends on the amount you're raising: smaller sums are quicker, larger ones take longer. If you need funding urgently, consider raising a smaller round.
What’s a Good Investor and Pitch Strategy?
- Investigate potential investors and their portfolio projects to identify those who might be interested in your project and would be a suitable fit.
- Initiate contact with lower-tier investors to pitch your project. Refrain from contacting numerous investors at once, and avoid reaching out to top-tier investors first.
- Collect questions and feedback from investors, then adjust your pitch deck as needed.
- Treat pitching as a learning experience and progress step by step.
- Be prepared for an extended process, as closing with a single investor may require 5-8 calls.
How Do You Find a Lead Investor?
A lead investor is the first to commit and contributes the largest investment in the round. Alternatively, two lead investors can co-lead a round by contributing the most significant amounts, accounting for roughly 50% of the round. For instance, if you raise €10 Million, a lead investor would invest between €3-5 Million.
In some cases, a smaller investor who wants to invest may help connect you with a potential lead investor from their network, although this is not very common.
There is no legal framework for a lead investor. They usually lead the negotiations for favorable contracts and have the most significant impact on the round, but all investors in a round sign identical contracts with varying amounts. Securing a committed lead investor makes it easier for others to follow, as they have already performed due diligence. This functions as a signaling game for other investors.
Common Things to Ask an Investor After Your Pitch
When conversing with an investor after your pitch, consider asking the following questions:
1. Post-Investment Support
Inquire about the investor's involvement and support after investing in a project:
- How often do you conduct check-ins?
- What kind of support do you typically provide to teams?
- How frequently do you want updates on the project?
- What are your expectations?
2. Financial Metadata
In the second or third call, ask about:
- The size of the fund
- The fund's duration or if there is an expiration date (which could impact follow-up funding for your next round)
- Any plans for a new fund
3. Portfolio Company Introductions
Review the investor's portfolio to identify other companies they've invested in. If any of these companies could potentially partner with your project, mention this in your conversation with the investor. This approach creating a positive impression and allows investors to obtain feedback about your project from their portfolio companies.
4. Commitment from an Investor
When an investor commits to your project, consider asking:
- Who are other investors they commonly co-invest with?
- Which investors do they think you should connect with?
- Can they refer you to another investor?
Topics to Avoid in Early Investor Conversations
During the initial calls with an investor, it's best to focus on building rapport and discussing the core aspects of your project. Avoid diving into certain details too early, such as:
1. Due Diligence on Incorporation Structure and Fundraising Instruments
In the early stages of your discussions, it's not necessary to delve into incorporation structure or specific fundraising instruments like SAFE, Token Warrant, SAFT, or Convertible Notes. Typically, these matters are addressed by your legal team and the investor's legal team after they've made a commitment.
2. Check Size
As check sizes usually correspond with your fundraising stage, the investor will likely bring up the topic themselves during your conversations. Focus on presenting a compelling pitch, and let the discussion about check size arise naturally.
By focusing on the most important aspects of your project in the early conversations with investors, you can create a strong foundation for a successful partnership. Save the nitty-gritty details for later, when both parties have expressed a genuine interest in working together.