Funding

Enterprise Startup Fundraising – Negotiating Valuation and Investor Shares

In January 2018, we launched our brand-new Startupedia platform (hope you made the launch party!). As a companionship initiative, we introduced the VC Connect Q&A Webinar, a brand-new online series that connects entrepreneurs with Silicon Valley investors for personalized fundraising advice. The series kicked off on January 25th with investor Vignesh Ravikumar from Sierra Ventures, who joined a group of SaaS and enterprise entrepreneurs to discuss investor outreach, valuation, metrics, and milestones.

Here’s a quick summary of Vignesh’s key points and advice—we hope it’s helpful to other entrepreneurs out there as well.

Negotiating your shares given to investors.

How you negotiate a fundraising round and how many shares to give up depends on multiple factors. For example, it can depend on how competitive the round is. One helpful fundraising tactic is to do things in parallel, and make sure the round in question doesn’t get dragged out—make sure you have all your documents and materials ready to go. Even better: get 2 to 3 venture capital firms to compete for the round.

Vignesh has also found that many early-stage companies fresh out of a well-known accelerator tend to overestimate their valuation. If you want to control dilutions, price is not the right mechanism—instead, the dollar amount you are raising is a better mechanism. There has to be a balance between the two. If you raise at a too-high valuation and things go wrong in the business, or you don’t hit your quota at the end of a quarter, the existing investor will be displeased. A natural progression of the valuation is very important, not too low but not too high.

Find your lead investor.

A challenging aspect of fundraising is usually finding investors that are willing to lead the investment. Vignesh used his own firm as an example: at Sierra Ventures, they talk to companies raising $12-15 million in a series A round, but won’t necessarily be the lead investor. Usually, existing investors can put in the pro-rata. But here’s the good news: getting follow-up money isn’t hard in Silicon Valley. As soon as someone has the lead, the rest of it is relatively straightforward.

  1. Determine how much you need to raise.
  2. Talk to all the investors that can write a $6-10 million dollar checks.
  3. Have a small amount set aside for your pro-rata—founders may come in to do super pro-rata.
  4. You might save some funds for strategic angels or investors that you want to bring in to the round.

Get the investor excited first. Then discuss valuation.

Valuation should be a secondary consideration—building excitement about your company is the best way to get the funds you need. With a transaction-based company, you won’t get the same revenue multiple that a non-transactional-based company would get.

The valuation and investor shares will also be affected by how competitive the process is—and how badly you want the deal.

Figure out the repeatability in your sales motion and sales cycle.

When investing in a series A stage for enterprise and SaaS startups, the investors at Sierra Ventures like to see that you’ve figured out the repeatability of the sales motion and the sales cycle. It might sounds strange, but you want to think about things on a scale of 0 to 1. At level 0, you have little to no sense of your product’s sales cycle; at 1, you have a complete handle on it. The closer you can get to 1, the easier it is to raise more money.

The amount you garner in a series “A” fundraising round also depends on how crowded your market is. Even if you’re different from your competitors who have raised money you’ll be lumped into the same category. Something to consider: most investors generally think in terms of quarters when checking to see how well you know your product’s sales cycle—Vignesh advised having at least couple of quarters where you have not only been hitting your quota but consistently beating your quota.

Revenue versus annual recurring revenue.

Investors like annual recurring revenue is because it’s more consistent and there is no “lumpiness.” A lot of investors get excited about numbers, but it’s not entirely necessary if you can paint a picture of a company that is acquiring users.

It is getting harder to do that as you see more and more companies like Snapchat who is struggling to retain users. As you think about building out the business you have to think about where the strategic levers are where you can get non-linear growth to scale effectively.

As they say at Sierra Ventures ‘Revenue is a great deodorant.‘ It solves problems on the surface today, but at the end of the day if you want to build a big company you want to think about what is the category that you are creating and that you’re owning.

To build a big company – think about the long-term user case.

When pitching to investors and customers, focus on the end-user experience and the value you bring to them. If you want to build a big company, you have to think about the long-term user case. Position yourself differently by explaining how do your customers drive additional revenue and the additional value they create when using your product, rather than how they will fit with a compliance solution.

 

Join our next VC Connect Q&A webinar.

A special thanks to investor Vignesh Ravikumar from Sierra Ventures for providing invaluable advice and for leading our kick-off VC Connect Q&A webinar! Get a spot at one of our upcoming webinars here https://startupedia.info/vcconnect/.

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