How much to raise at Seed?
Regardless of what side of the coin you are on and how long you have been in the game, the answer is not obvious. In fact, when asking around, responses vary widely.
Viewpoint: Raise as much as you think you’ll be able to answer for at the next round
Why do we say that? Because as the saying goes ‘more companies die from indigestion than starvation.’
Everything looks great when a company raises an £8m Seed or a £20m Series A round, but with that fundraise, founders are effectively making a promise to the market that the money will be well invested and spent by the next round.
Raising a Seed round of £1m vs. £5m will yield different market expectations in terms of the progress in the ARR or product development. With the smaller round, founders also have the chance to come back to market and raise £2-3m in a seed-plus/pre-A round later, if things don’t go to plan. Whereas in the other case, the market expects a Series A and some great traction, or the company may be doomed to shut down.
CASE EXAMPLE: A SaaS company has raised a £10m Series A round. By the time the money runs out, the expectation is for their ARR to be c. £3m. If they have not hit this milestone, VCs will question what was done with their investment.
While this is not something that most founders think about, it’s vital. Start-ups must be able to show progress in their ARR and product development proportionate to the investment to be able to raise a later round. It would also imply that the business is likely to be less susceptible to volatile markets.
This taps into the heart of our capital efficiency thesis.
Now, don’t think that we take this stance to limit risk by investing less. In fact, we have often found ourselves pushing founders to raise more from us. Why? Because it made sense! When founders present realistic goals, we evaluate and provide them with what we think they would need to realistically reach those goals. Remember, founders should be prepared to showcase market, product, and competitor knowledge.
Viewpoint: Raise for a 18–24-month runway based on a carefully thought-out business plan
This is probably the most sensible way to think about fundraising because it shows a founder knows the drivers of their business.
It involves building a three-to-five-year financial model that plans out revenue growth and required expenses, demonstrating the scale of the ambition and plans. That plan will need to scope out an 18–24-month runway, even if revenue growth is only 50% of what was planned.
Most importantly, founders should plan to comfortably hit the milestones for the next round by the time they will need to go back to the funding market, e.g. a Series A investor might expect to see >£1m ARR, >200% YoY growth, mature GTM processes and sales playbook (not founder-led sales).
And don’t forget, fundraising should start six months before the runway fully runs out and July, August and December are the hardest months to close.
Viewpoint: Raise what the market is willing to pay
One of the most common approaches to raising a round. Either founders think “our competitor raised £Xm based on £Yk monthly revenue” and want to do the same, or an investor has a minimum cheque size and they ask whether the start-up will consider a bigger round.
It is always a plus to be able to compare your estimate of required funding against a competitor. That said, don’t fall for this alluring trap of a larger valuation unless one of the below applies:
- You are certain you will be able to show traction and results at the next round
- You can use this money to buy yourself extra runway, an extra pivot or allow to grow to a late-A round. For the latter, you will need treat every month as if the runway is running out, even when it’s not. You’ll also need an investor that doesn’t demand you spend the money in 18 months and “just accelerate the growth more” rather than finding out that the money is being spent well.
Viewpoint: Raise enough to scare investors away from investing in competitors
This is one we had not considered previously but has a small argument for it. If a founder manages to secure a huge round from the biggest, best-known fund in the world, other funds may think twice about investing in your competitors. After all, that start-up already has a leg up. That said, it’s a risky strategy and while it may get results initially, all the above points remain true.
Viewpoint: Raise as much as you can
Sadly, an extremely common approach. If there is cash in the market, founders think that they should squeeze as much as they can out of the market to get the highest valuation possible, as they will ultimately dilute their stake by 20-25%.
Now that’s all fine if the funds are deployed wisely and successfully. Otherwise, this will have very real negative effects on the business as we showcased in the first viewpoint. As an example, a start-up with £10m in funding to date and a £1m ARR will struggle to get additional funds from most VCs.
The only scenario in which this approach can work is if the funding is used as a simultaneous Seed and a Series A round. Once again, this will require the founders to keep an eye on spending the money effectively, achieving the predicted product market fit and investing in growth to achieve results and returns that justify another round.
It will also require founders to make hard decisions like pivoting when the business isn’t working, despite having ample runway.
Conclusion
Raise as much as you need according to your projected business plan, but also ensuring you’ll be able to justify the amount you’ve raised the next time you come to market. It is risky to raise excessive funding if it can’t be deployed effectively, but if you must, make sure you deploy it efficiently.
Remember, as a rule of thumb for SaaS businesses: a Burn Multiple of <2x is the minimum of what you should end up when you come back to the market, meaning for every £2 burned you generate £1 of ARR.
