What should you price your seed round at?
Well, it depends...
I could probably write a book on venture round pricing dynamics. It would have lots of philosophy, religion, theory, fiction, and pontification.
However, since I only have time for a blog post, I'll settle for actual data.
Since January of 2010, when I led my first seed investment in Backupify, I have led or committed to 27 investments. That includes all the deals I did at First Round, with the exception of Refinery29, which was a Series A. That also includes 16 Brooklyn Bridge Ventures deals done and five agreed to term sheets. Yes, it's going to be a busy fourth quarter.
The criteria for what is a Seed and what is a Series A for these purposes is whether or not the first round of the company was within the same year that I did the investment, and it had to be less than $750k of prior money. Refinery29 fell out based on timing.
So what does the data say.
Well, if you group them all up, here's what you get:
|Pre-Money Valuations (M)|
You wind up with about a four-ish valuation, mostly right around four, but with some outliers that bring up the average.
But price doesn't tell the whole story. What about the round size?
|Round Size (M)|
So the average round that I'm participating in is about a million bucks. For those of you that have trouble doing division, not surprisingly, that puts the average dilution right around 20%, which isn't surprising.
So, if you're looking at pre-money valuations saying "But hey, my deal wasn't valued at X, WTF??" then you need to take a look at the dilution numbers.
That's the dirty little secret of pricing:
Pre-money isn't the price. Dilution is the price and you're all pretty much getting the same deal.
On the other hand, stage matters, too... and stage generally impacts the resulting pre-money. How much money you get from investors reflects your stage. You start out at an accelerator or just raising some friends and family and that tends to be small potatoes. Maybe you raise a pre-seed after and that's like $750k to a million. Next round might be $2M, next after that $5M or more, etc etc. The further you progress, the more money, typically, that you get.
There's less money available for riskier and earlier deals, which makes sense.
So, if you're raising $750k and someone else is, you're probably at about the same stage, but if you had to give up half your company to get it and someone else only had to give up 10%, that's really where pricing matters--not so much the pre-money.
It's quirky, but that's the way that VCs think.
That also means that the best way you can move your price up is to create demand for your round. If you're oversubscribed, but don't want to take additional dilution, you can usually move the price up.
So what effects pricing and how much people raise. Across these 27 deals, here's what I saw...
Does it matter if you're launched? What about if you have some revenues?
|Pre-Money Valuations (M)|
Some interesting things happen here. There's very little difference in whether or not you've officially launched. However, having revenues does seem to make a big difference in the Pre-Money price. 12-20% depending on how you look at it.
But what really counts is the dilution. Did you have to give up more of the company?
Yes, for sure, especially with revenues. Launching may or may not give you less dilution based on whether you're looking at the median or the average, but across the board, having revenue changed how much dilution an entrepreneur had to take. When you're making your own money, your need for other people's money goes down and so does how much of the company you have to give up.
Can you raise a bigger round based on launching or having revenues?
Here's where the data gets really screwy, but I have a theory.
According to this, launching and having revenues caused the round sizes to go down. What??
Well, it's simple. If you haven't launched and you don't have revs, you're simply going to need more money, because you have more things to do.
One thing I thought of is that if you're able to raise money pre-launch at all, especially with a larger round, well then you must be the world's greatest team, right? That would mean you get a better price, right?
Well, that didn't hold above, right? The rounds are bigger, sure... but you're still taking the same if not more dilution than everyone else. So, yeah, you and your great team may get more money, but don't expect less dilution as well.
Can't have your cake and eat it, too.