Julian Zegelman is an emerging venture investor, serial entrepreneur, and the founding partner at Jaguar Capital Advisors, a boutique investment bank and multi-family office. In this episode, we talk about the nuances of fundraising for Seed and Series A rounds.
Key takeaways from Episode 04
- There are rules of thumb that help founders figure how much money to raise “Typically you want to ask for 12-16 months of a runway. Which is how much money do you need to reach the milestones and get your business to the next level,” said Julian. “This would allow you to show significant traction and raise the next round of venture capital, then get to profitability and the exit point”.
- When it comes to valuations, there are different targets for companies based in Silicon Valley and outside of it. “There’s a standard range of valuations that sometimes shifts up and down, depending on geography. Typical seed-stage company outside of Silicon Valley today is raising money at $3.5 to 5 million pre-money valuation. In pre-COVID Silicon Valley, we’ve seen valuations reaching $10, $15, and even $20 million pre-money for more high-profile companies. In the current environment, for me, the comfortable valuation would range from $5 to $10 million depending on traction.”
- There are a number of fundamental issues can prevent startups from raising capital. “The biggest blocker is having a company that nobody wants to invest in. It might be a business model that inherently is not a venture capital model, a consulting business, or a professional services life style gig. The one that lacks fundamental scalability aspect of a venture type company” said Julian. “For a venture-fundable company, it could be a lack of clear legal structure or of ownership of IP. Other issues include a messed up the capital structure, a dispute among the founders, money required to buy out inactive founder, or to secure IP. So anything complicated from the get-go is probably not going to get funded… Finally, a company that operates in an inherently limited market is unlikely to attract venture capital.”
- A mid-stage trap is the biggest problem for companies that are further along. “Some companies that are further along get trapped in the middle. A trapped company might have raised Seed and Series A rounds, but lacks hyper growth to raise new capital. However, it doesn’t cut the burn rate to scale down the business and work it through an exit. Often such companies flame out and shut down or it manages to raise the money and exit at lower multiple. By then founders get diluted to the point of making it an exercise in futility.”
- Purpose and typical size of the seed rounds. “You look at 1-1.5 years of runway that would get you to the product-market fit. In terms of the size, typically it ranges between $1 and $3 million.”
- There are three components that you need to raise a Series A round. “You need three components to raise a Series A round: product-market fit, revenue (and other) metrics and growth”, said Julian. “You are too early for Series A if you are still looking for product-market fit and testing your assumptions, or if your growth rate is missing. You want to have a $1 million ARR, attractive metrics including positive ratio of CAC and LTV, ideally a payback of less than 6 months for most SaaS verticals… low churn, automated sales channel, and you really got to show growth.”