Do you want seed financing? Why Investors Want to See $72 Million in Earnings in Year 10

What would ensure that your company could pay for itself at an early stage? Investors typically talk about three factors that drive their decision-making: team, product, and market. But there is a predominant component that overlaps all three. That is, how much return your company can generate for investors if all three factors match as hoped. If that return isn’t big enough, investors won’t want it, according to Augustin Sayer of Newfund, a $300 million startup VC firm.

It’s common to hear VCs make the sweeping statement that you need to show a path to 1000x revenue growth and 100x valuations to justify an investment. Sayer has unpacked the details behind that hurdle in a series of LinkedIn posts.

Sayer’s specific example envisions a SaaS company raising a seed round of $3,000 in monthly revenue, which will eventually stop at a valuation of 10x revenue. To justify a $1 million seed investment with a $4 million valuation, he suggests, a company would need to show a path to achieving $72 million in annual revenue by year 10 after the seed investment. . The reality for your business may vary depending on the standard multiple applied to valuations for your type of business (which VCs and some fellow founders should be able to tell you), some details of your path to growth, and the details behind your fundraising. But Sayer’s forecasts are broadly in line with the industry’s common assumption that VCs look for potential unicorns when making an investment.

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The goal of a VC investing in your company is the potential to “recover the fund,” meaning you generate an exit equal to the total size of the fund. For a fund that makes 100 investments, the hope is that a few of them will generate a return equal to the fund’s total size to compensate for the fact that the vast majority of startup investments never make a profitable exit. will generate. Sayer shows that a $100 million fund that makes $1 million seed capital investments at a $4 million valuation must account for the probability of 20 percent dilution in each of the next two rounds of funding, meaning the seed fund will have an exit. wants to see that is equal to 144x the valuation in the initial phase of the investment.

So if you are trying to get seed capital, know that VCs will come to meetings with you who have already done this math. And they expect you to show that you’re aware of the calculations — and have a plan for generating this return for their money.

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