This article is part-two of Burkland’s three-part series on what startups need to know to raise Series A funding successfully. For related information, also see part-one, When Should My Startup Raise Series A Funding? and part-three, Critical Series A Finance Metrics for SaaS Startups.
How Much Should a Startup Raise at Series A?
The median Series A round size in 2021 was $10MM, according to Carta’s Q4 2021 Private Market Report. This represented a 100% increase since 2016. For startups with proven product-market fit and strong growth metrics to back it up, ample funds are still available, and now is a good time to raise a Series A round.
With that in mind, you should raise the funds you need at Series A, and not more. VC funds come at a price, and that price is a valuable equity stake in your company. (More on that in the next section of this article.) The key is to pinpoint the optimal funding amount to shore up your cash runway, accelerate growth and corner your share of the market while preserving as much equity as possible for your team and future investment rounds.
To help determine how much your startup should raise at Series A, analyze your existing runway and your anticipated monthly burn rate post-fundraise. We typically advise startups to secure 18-24 months of runway when raising Series A. Assuming that you’re raising Series A to accelerate growth, the calculation isn’t as simple as just multiplying your current burn rate by 18 or 24. Presumably, your expenses and revenue will increase after the successful closing of the round.
- If you currently have 15 team members, how many team members do you expect to have in the months after you raise Series A? How will their salaries and benefits compare to your current team’s?
- Similarly, will you increase your use of independent contractors?
- If you’re spending $20K/month on marketing now, how much do you expect to spend for the next 18 months after the round?
- How much do you plan to invest in additional infrastructure and other capital expenditures?
- What kind of revenue growth do you expect to see after closing the round?
Your fractional CFO will work with you on the assumptions needed to help project your revenue and expense growth, and develop the related financial model including a 2-3 year financial forecast. This information will help you zero in on the optimal amount of money to raise to last 18-24 months.
How Much Dilution Should a Startup Expect When Raising Series A?
The range of dilution for a Series A round in 2021 was 12%-26%, with the median dilution being 20%, according to Carta’s Q4 2021 Private Market Report.
Even though funding round sizes have increased substantially since 2016, dilution has actually decreased slightly in recent years due to soaring valuations. Recent upheavals in the world including war, supply chain delays and inflation have given rise to softening valuations in 2022. We’ll be monitoring startup valuations closely throughout the year.
Any amount of equity is precious, so you want to raise Series A at the right time when you have a real need for the funds. For more on timing your round, see When Should My Startup Raise Series A Funding?.
Series A Valuation
Of course, how much money you actually can raise at Series A and how much dilution you should expect for those funds will be directly related to the current valuation of your startup. For a simple example, if you want to raise $10MM in exchange for a maximum equity stake of 20%, your startup had better be worth at least $50MM. Our next article in this series examines the most critical Series A metrics for SaaS startups and other key factors investors examine to value any startup.
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