Questions

Pre-seed / seed funding for a community app... valuation and how much to take from investors?

Hey guys, We're building a community for startups and entrepreneurs (http://teamstoryapp.com) iOS is currently live with invite-only: https://itunes.apple.com/gb/app/teamstory/id834137499?mt=8 and Android is in development right now (launching in summer) We have angel investors reaching out to us and asking about the valuation & pre-seed investments. We are just wondering how much we should raise in this case... 1. What are some valuation range for a startup / product like this? 2. How much of our valuation should we give to the investors (we're talking about a small investment like 50K) 3. Should we get investments at all for now? Right now we're silent launch with 300 iOS users and 1000 on waiting list on both android and iOS. Thanks

5answers

To answer your questions:
1) Mobile companies at your stage usually raise angel funding at a valuation equivalent of $5,000,000 for US based companies and $4,000,000 to $4,500,000 for Canadian companies.
2) The valuation is a function of how much you raise against that valuation. For instance, selling $50,000 at $5,000,000 means you are selling debt that will convert into shares equal to roughly 1% of your company.
3) I would encourage you to check out my other answers that I've recently written that talk in detail about what to raise and when to raise. Given that you've now launched and your launch is "quiet", most seed investors are going to want to see substantial traction before investing.

It's best for you to raise this money on a convertible note instead of actually selling equity, especially if you are intending on raising $50,000 - $100,000.

Happy to schedule a call with you to provide more specifics and encourage you to read through the answers I've provided re fundraising advice to early-stage companies as well.


Answered 11 years ago

Been there done this and got a major investor on board. Let me know if you'd like to chat.


Answered 11 years ago

First thing first, this purely depends on where you guys are based. If you're based in Silicon Valley you could potentially raise more money at a better valuation. My experience however is raising money in Europe, specifically in the UK and Portugal, and although I have raised from angels across the world from places like China, Singapore, US, and the Middle East, I will speak to the mentality of European investors.

At the stage you are at right now, I would suggest going for a 100,000 GBP round. Whatever amount you decide on, DO NOT CHANGE IT. Throughout the entire fundraising of this round (whether it is one week or two months) make sure not to change the asking amount. So be very picky with this number.

Second, set a minimum investment amount from each investor. Since you are dealing with a seed stage round, I would suggest to go with around 10k GBP (so max you end up with 10 investors with minimum amounts). If you feel that is too high then drop it to 5k, but then also bring your asking amount down to 50k.

Valuation range for your stage and startup (in Europe only) would be less than 1 million GBP (around 500k to 800k). If you're lucky and have a ton of interest from investors and can create competition among them, you could potentially get up to 1.5 million GBP. This means that if you're raising 100k GBP as a seed round, you'd be giving up between 10% to 25% depending on your valuation.

I would recommend not giving up more than 25% in a seed round, and know from experience that unless you're lucky or dealing with investors who don't know what they're doing, you will need to give up more than 10%.

I'm happy to speak in more detail about this if you feel it would be helpful.

Ali Ahmed


Answered 11 years ago

When most people talk about raising funding for a mobile app or a start-up, they immediately jump to venture capital. That makes sense: VC investments are often talked about in the media, and because venture capitalists make some of the largest investments, they tend to be the “big fish” of the funding world. However, venture capital firms are not the only possible source of funding. While it is less glamorous, one of the first places that most entrepreneurs look for funding is their friends and family. Unless you come from wealth, friends and family (F&F) money will usually be small-scale, initial investments made partially to seek a return on investment and partially because the investor knows and believes in you. That said, just because you know the people investing does not mean you do not have to treat them like investors. Ultimately, if someone puts money into your idea, you owe them a return. Do not take these initial investments lightly. You will need to present a good case for why your idea has merit, and especially at this early stage, you will need to stretch every dollar as far as you can. If people see that you use your investment money wisely, they will be more likely to invest more later. While many are quick to dismiss it, F&F money can be a meaningful source of capital when just starting a business.
Raising even a few thousand dollars can help with the initial expenses of testing and validating your idea. I will still say that it is not limited to a few thousand dollars or 50k because it all depends on the type of Seed funding option you select. Many companies have raised more than a million dollars by Seed funding alone.
1. Crowdfunding: With more than 500 crowdfunding platforms currently active, this has become one of the most popular avenues of seed funding. Crowdfunding platforms are usually open and anybody in the world may end up backing the concept, idea or product. Some examples of successful crowdfunding campaigns include the Oculus Rift which raised more than $2 Mn, Pebble wearables which raised more than $10 Mn, and Indian company Exploride, which raised more than $500K for its heads-up display for cars.
2. Corporate seed funds: This is a great source of seed funding as it comes with big visibility for the start-up brand. Tech giants such as Apple, Google and Intel back start-ups regularly with seed money. Big companies often look at start-ups as a future source of profit, IP or talent, and that is the primary motivation for investment here. GV is the investment arm of Alphabet (Google’s parent company), while Intel Capital is chipmaker Intel’s dedicated division for start-up investments.
3. Incubators: Incubators generally provide small seed investments and offer services such as office space or management training. Most incubation programmes do not take equity from the start-up but do offer support beyond just funding. The Indian Angel Network Incubator, IIT-Bombay’s Society for Innovation and Entrepreneurship or SINE, Khosla Labs and state-backed incubators such as T-Hub and KSUM are some of the most active incubators in India.
4. Accelerators: Accelerators are more focused on supporting start-ups in scaling up their business rather than backing and nurturing early-stage innovation. Accelerators also back start-ups through small seed investments along with professional services, networking opportunities, mentoring and workspace. Unlike most incubators, most accelerators take equity as they are privately funded. The popular accelerators include Y Combinator, TechStars and 500 Start-ups.
5. Angel investors: Angel investors are individuals that offer capital in place of ownership equity or convertible debt. They are called angel investors because they provide capital at times when the risk of a start-up failing is high, which is during the early stage. In India, the top angel investors in H1 2019 are Sanjay Mehta with eight deals this year, followed by VC Karthik, Siddharth Ladsariya, Sharan Aggarwal and Sachin Tagra – each adding seven deals.
6. Personal Savings: Founders may put in their personal wealth and savings as seed funding. Also known as bootstrapping, this brings extra financial pressure but there is no pressure on founders to return borrowed money.
7. Debt Funding: Debt mostly includes money taken from banks as loans or borrowed from friends and family. Sometimes, venture capitalists or angel investors also issue loans instead of equity investments to ventures in sectors where cash burn is high, but so is the traction.
8. Convertible Securities: These are investments which start off as loans but change into equity or shares depending on the progress of the company, and when it reaches certain milestones such as sales or revenue targets.
9. VC Funding: Venture capitalists are marquee investors that provide funding based on several parameters such as growth potential, market conditions, founder vision, idea or simply execution. In return, they take some portion of equity or stake in the start-up. VCs usually join multiple rounds of investment after seed stage, if the start-up managers to reach those rounds. For seed funding, Accel Ventures, Seed fund, Sequoia Surge, Axilor Ventures, SEA Fund are some of the most venture capital firms in India.
10. Angel Funds or Angel Networks: Sometimes, investors come together to form angel networks or groups where they each invest small amounts in the idea or the company during the early stage financing round. The major angel networks in the market currently are AngelList, Indian Angel Network, Lead Angels, as well as angel networks for each major start-up hub in India.

The answer to your question as to how much valuation you should you give to the investors is simple answer. The simple answer is the absolute minimum amount you need to make your plan work. Some entrepreneurs try to start with a huge number, hoping they can negotiate and close on a smaller one, while others understate their requirements, in hopes of getting their foot in the door with an investor. Neither of these strategies is a good one, as both are likely to damage your credibility with potential investors, even before they look hard at your plan. Here are the parameters you should use in sizing your request—and be able to explain in justifying your request to investors:
1. Consider implied ownership cost. If your company is early stage and has a valuation under $1M, do not ask for a $5M investment. The investor would be buying your company five times over, and he does not want it. If your valuation is around $1M, you can validly ask for $200K–$300K and offer 20–30% of your company in exchange.
2. Type of investor. Angel investment groups usually won’t consider a request over $1M, while venture capitalists won’t look at anything under $2M. Amounts of $100K or less, are usually relegated to “friends and family.” Approaching any one of these groups with a funding request outside their range is a waste of your time and theirs.
3. Company stage. If your company is still in the “idea” stage, you have no valuation, so size your investment request based on goodwill that you have with your rich uncle, and your business track record. Angels might be interested during your “early stage” if you have a prototype, but VCs will not bite until you have a product, customers, and revenue.
4. Calculate what you need and add a buffer. Do your financial model first with the volume, cost, and pricing parameters you want. See where your cashflow bottoms out. If it bottoms out at minus $400K, add a 25% buffer, and ask for $500K funding. The request size must tie into your financials to be credible.
5. Investment terms. The most common case is an equity investment, but there are many terms that can impact what request size is credible. I’m talking about things like anti-dilution clauses, preferred versus common stock, valuation tied to later rounds, warrants, and bridge loan options. More restrictive terms reduce the credible investment amount.
6. Single or staged delivery. In many cases, a single investment request may be scheduled for delivery in stages, or tranches, based on milestone achievement. Obviously, this reduces investor risk and allows a larger commitment, since they can limit their loss if you fail to meet key objectives.
7. Use of funds. Investors expect to see a “use of funds” list, and they expect the uses to apply only to your core mission. In other words, do not tell investors that you intend to buy a fancy office building or executive cars with your funding. Even executive salaries should be minimal at this stage.
8. Projected return on investment. Most entrepreneurs skip this step, but it helps your credibility to include it. Estimate a return on investment (ROI) by projecting company valuation at exit, to show the investor who has 20% what he will get back for that initial investment. He is looking for a 10x return since he assumes only one in ten survive.
Obviously, determining the proper size of your investment request is a non-trivial exercise, but it’s one of the most critical factors for investors in making a decision to invest or not to invest in your company. You need to get it defensibly right the first time because changing your request under pressure will kill your credibility.
Nowadays, technology has enabled founders to rapidly build a software product or hardware device in a short period of time and get it out for the investors to judge for themselves. Once they get to know the product, the first thing that will be assessed is product-market fit. Without projected growth numbers, this is a crucial part in a start-up’s early journey. It will be quite hard to convince outsiders to support the product if the market-fit is not great. So, have answers for questions about the following major points:
1. What is the market opportunity?
2. Who is the target audience or customer?
3. How does the product solve an existing problem?
4. What will be the adoption rate?
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath


Answered 4 years ago

Valuing a startup at the pre-seed stage, especially for a community app like yours, can be challenging due to the lack of substantial financial data and the early stage of user growth. Here are some steps and guidelines to help you with valuation and investment decisions:

### 1. Valuation Range
The valuation of a pre-seed startup can vary widely based on several factors including the market potential, the strength of the founding team, the product’s uniqueness, and early traction. Given your current traction (300 iOS users and 1000 on the waiting list), a reasonable valuation might fall between $1 million to $3 million. Here’s a breakdown:
- **Market Size**: The larger the potential market, the higher the valuation.
- **Team Strength**: Experienced founders with relevant backgrounds can boost valuation.
- **Traction**: Early user numbers and growth rates are critical.
- **Product Stage**: Having a live product on iOS and development on Android is positive.

### 2. Equity for $50K Investment
For a $50K investment at a valuation range of $1 million to $3 million:
- **At $1M Valuation**: $50K would represent 5% equity.
- **At $2M Valuation**: $50K would represent 2.5% equity.
- **At $3M Valuation**: $50K would represent ~1.67% equity.

### 3. Should You Raise Investments Now?
Consider raising funds if:
- **You Need Capital**: For scaling, marketing, or completing Android development.
- **Investor Expertise**: If the angel investors can provide strategic value beyond money (mentorship, connections, industry knowledge).

**Risks of Raising Now**:
- **Equity Dilution**: Giving up equity early can dilute your ownership, impacting future funding rounds.
- **Premature Scaling**: Raising funds too early can lead to premature scaling before achieving product-market fit.

**Benefits of Waiting**:
- **Better Valuation Later**: With more users and clearer traction, you could command a higher valuation.
- **Ownership Retention**: Retain more equity by delaying funding until necessary.

### Detailed Steps
1. **Prepare Your Pitch**: Highlight your traction, the problem you’re solving, and your growth plans.
2. **Determine Milestones**: Set clear milestones that justify the valuation (e.g., user growth targets, Android launch).
3. **Negotiate Smartly**: Focus on finding investors who offer more than just money.

### Example Calculation
If you decide on a $2M valuation and raise $50K:
- Post-Money Valuation: $2,050,000
- Equity Given: $50K / $2,050,000 ≈ 2.44%

### Recommendations
- **Validate Interest**: See how your app performs post-Android launch before committing to investments.
- **Angel Investors’ Value**: Choose angels who offer strategic value beyond capital.

Would you like more detailed financial modeling or assistance with preparing your pitch deck for investors?


Answered 4 months ago

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