Chapter 6: Raising Capital
When it comes to setting a valuation for a capital raise, there’s about a million different things to consider. The first one is what stage are you raising at? Obviously if you’ve had successful raises for your company in the past, you want to make sure the next raise is at a higher valuation. This could present difficulty if you didn’t hit the milestones you intended to based on the prior raise. If a company is struggling and needs to raise capital at a lower valuation than a previous capital injection, then that is considered a “down round”. However for the purposes of this section we’re going to assume that your company has been hitting its milestones and investor opinion on your business is generally favorable. So what all should be taken into account when choosing a valuation?
If you haven’t raised capital for your company before, it’s important to take into account additional capital raises in the future. You don’t want to sell 40% of your company on an initial raise, since it would make it very difficult to do a subsequent raise down the line without diluting your ownership below the 50% mark. Your valuation should be inclusive of this idea, with room to grow for future raises, while getting you the funding you need right now, without too much equity cost.