How to forecast your fundraising till you exit

How to forecast your fundraising till you exit

Tl;dr: Plan your path from now to exit. How much do you need to grow at each and every stage, and how much funding do you need to support that? Free tool in Excel

How do you answer these questions from an investor?:

  • How much do you want to sell for?
  • Why are you raising [$1.5m]?
  • How much will you raise at your next round? When will that be?

It all starts with knowing what you want. If you know what you want you can plan how you are going to get there, but we are going to do it backward. You need to think about your ideal outcome – an exit. Then trace back the steps you ‘took’ to get there as it gives you a better roadmap of where to go and how to do it.

This will make no sense, but it will soon. I’ve been teaching this to founders for years, but I never made a tool to make it easy to do. The tool helps you figure out what you need to raise now, by starting at the end. Your exit, then working all the way back to now, so you know exactly what you need to keep achieving.

[Yes, as usual, I’ll put up a training video soon.]

Future fundraise model feedback

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To raise or not to raise

You have three options in startup land to fund your business:

  1. Blue pill- Bootstrap: you fund your business out of cash flow from customers. The benefit is you control 100% of your company
  2. Red pill – Investors: you raise money from investors as soon as you can and become addicted to funding heroine
  3. Purple pill – see if you are a rocket ship: bootstrap your business until you are growing so much that it actually makes sense to do a funding round to knock it out of the park

Most kids these days want the red pill. Investors don’t tell you what is going to happen and after you take it you realize that being VC funded was all it was cracked up to be.

This blog is about taking the red pill. It assumes you are going to be raising till you exit and that every dollar you generate will be plowed in immediately to grow your business.

The red pill is something you should spend a lot of time planning for, but there has never been a tool around, till now.

Fundraising as pass the parcel

You need a paradigm change when you are a funded startup. It not about getting to the exit, it’s about getting to the next stage or milestone, sequentially validating a new aspect of your business. There is a reason you don’t get a monster $300m funding round like Wag, when you start out- you haven’t proven enough.

So, what are you proving at each stage?

  1. Angel: Show you can build a product and get users
  2. Pre-seed / Seed: Seed these days is a ‘phase’ up to your series-A when things get serious. In the seed phase you are validating the core assumptions: is there a large market; can you do some ok marketing that works; can you hire talent; do you have the foundations of unit economics that work?
  3. Series-A: This is the start of real VC funding and the expectations get serious. It’s where a lot of startups don’t break through. Post your series A you are showing you can start to scale the business, implement systems and processes, make key hires like VP of sales. This isn’t Kansas anymore, you’ve moved to the bright lights of New York and you need to level your game up.
  4. Series-B: If you don’t burn out in your A round, then this round is all about showing you can scale what you have been doing. There will still be a few kinks but you are pretty clear about your unit economics, in particular, CAC, LTV and payback time. It’s about doing a whole lot more
  5. Series-C+: From this point, you are going to show you can cross the chasm into the mainstream market and make your business a household name. There are a lot more meetings with grey haired people

The reason the stages are so important is that investors don’t all hang out in the same pools. Growth stage investors don’t do Series-a, typically. Most series-A investors don’t do seed. Angels don’t have enough money to do anything else in 95% of the cases. So you are going to have different investors at almost every stage.

Now SHAZAM, you are now a VC. Congrats, I think? What do you care about? You care about your investee staying alive till exit over the long term, but in the short term you only care about one thing; that is your angel investment getting seed funded or your series-A company getting to series-B. If that doesn’t happen it is game over. As a founder that is what you care about too.

VCs, of course, will help with your raise and pimp you to the next stage investors. Only those investors all know this too and so only care about their opinion if they are doing at least the pro-rata or trying to get a larger allocation. That’s positive signaling.

So key learning here is you need to think in terms of milestones.

The next thing you are going to want to think about is how long will it take to achieve those milestones and with how much money?

You can plan your future exit

It’s pretty hilarious, I ask this question to founders and they never have a clear answer.

Do you know what the question is?

How much do you want to sell for?

Everyone responds “um, I hadn’t thought about it.” What I always say is “order of magnitude and in the right direction.” In other words, ballpark it, dude. Is it $5m, $50m, or a $ billion? Founders typically then say a billion, lol.

It’s so funny since these founders are raising money from investors, and all that investors care about is the exit. Founders know they have to sell but have no notion of their goal and the path there.

If I asked if you know how much money it will cost you to get to an exit and how much revenue you will be making, do you have an answer to that? Do you have any idea how long it will take to get there?

This blog is going to help you find not only those answers but so much more.

Start at the end

If you know what you want you can plan how you are going to get there. The future fundraise excel tool will help you do that.

When I first came up with it, I would draw it on paper. Draw an x/y axis and in the top right you write how much you want to sell for. So step 1, how much do you want to sell for? $1b? Fine.

Then you put that money into context with a simple exercise. Check what the multiples are in your industry. If similar companies have sold for, or trade on the public markets for 10x revenue then you know your approximate multiple.  Divide $1b by 10x and you get to $100m. $100m revenue, not $1b is now your goal.

So the big question you need to figure out is, how do you build $100m revenue company? How long is it going to take, how many rounds of funding and how much capital at each round? Crud, that sounds hard, right? Well, a little.

What you need to do is chunk things up into rounds. So the next question is how many rounds does it take to get to $100m in revenue? In this example, I am saying you do 8 rounds. On paper, I would draw a line from zero to exit, then draw 8 lines straight down from the line. Next, you should do some research and see how much it costs to build a similar company. Check CrunchBase. So you think it will take $150m to get there based on those comps. Well, how do you allocate those across the rounds? Well, the last ones will be the largest ones.

How to forecast your fundraising till you exit Backward math

Now we start at the end. Draw an arrow from your series-E to exit. How much do you need to grow from this round to exit and be an attractive IPO or acquisition? Maybe you say it is 60% revenue growth. Ok, cool then divide that and you know at series-E you need to be at $62m revenue. Now ask, how much revenue would it cost to add $40m in revenue and over what time period in months? $40m? I don’t know, put in something and you can review it.

Now we go back in time again. If you are raising for 18 months runway, how much do you want to grow to get to $63m at your series-E? If you double, then you are going to be at $31m at series-D. You figure how much you are going to raise to achieve that and keep doing this exercise till you get to where you are now.

According to the growth rate at each round, you can see how much you need to be at your angel round (or whatever round you are starting at).  If your numbers are too high or low then you need to iterate those numbers to make what you need to raise at your first round makes sense to be on the trajectory you want to ride.

Why are you raising $500k

What we have just done is mapped out each and every funding round and your revenue and growth milestones you think you need to achieve to get that round done and continue the game of pass the parcel. You have planned your whole future.

We worked our way backward, now you can read it forward. You raise at each round to be able to fund your defined runway to get to your next stage. You raise x to get to y, which gets you to z.

When an investor asks “why are you raising $500k?” you suddenly have the ammunition to answer this question in quite a revolutionary manner. You don’t just say “it seems like a standard amount at this stage we think we can raise” or something seemingly valid but not meaningful. You instead can say “we are building a billion dollar company, Jim. It’s going to take $150m in funding, 7 years and 8 rounds of funding. We are currently at $100k ARR. According to my analysis, I need to raise at least $500k to be able to get to $500k ARR to be able to raise our seed round of $1.5m. $1.5m is the amount I need to get to $1.5m ARR so I am positioned for the key round which is our series-A. We know that investors expect SaaS companies to be doing $1.5m ARR these days. If we are not able to raise $500k, we will be off our trajectory and unlikely to raise our series-A. If that doesn’t happen we will never be a unicorn.”

Investors, of course, care how you are going to spend the money. We will cover that soon.

Total clarity on your milestones

I know you are fixated on raising, but raising is a means to an end. As soon as you have closed your round, there is no bottle popping. It is time to get back to the real work of putting that investment to work and growing.

So congrats, you raised your series-A. Your goal now is your series-B. What do you need to achieve to close your series-B? I bet most people don’t know. They just try and grow as much as possible. That’s terrible. You and your staff want and love real targets. If you can say to your team we have to be at $6m ARR or it is game over in 18 months, then everyone knows exactly what needs to be done and you have to do whatever it takes to achieve it. That’s powerful.

I love 10x thinking. If I ask you how you would 10x your revenue you need to pause and think about all the things you need to do to achieve it. If I asked how you simply plan on growing, you don’t think as expansively. Having a goal gives you clarity. This tool tells you what you and your team need to deliver and it shows them there is a clear plan to making everyone rich.

You should share it with your investors and get their input on it. If you are raising your seed, ask your investors if you achieved these numbers would they fund you at your series-A? If not, then you need to revise your plan. It enables structured communication on the finance side, which is key with investors.

Check out the product / walkthrough

In this section, you are filling out the super key assumptions. Your exit target and how much you are going to grow at each stage. ‘Growth from funds’ is the big assumption you are making.

This is not just for angel stage companies. You can pick your stage and your current revenue and use this tool even if you are at series-C etc.

You can see a row ‘difference to where you are now,’ you need to iterate on your growth rates so that gets to zero. Then your plan works with the reality of where you are now.

If you want to put your plan into real perspective, you can now do a lot more. I’ve figured out everything you can derive from these numbers to help you ensure that the amounts you are raising and the growth you need to achieve actually make operational sense.

Insert your ARPA and CAC and you can see some interesting things. What that revenue means in terms of the number of customers you need and how much marketing spend you will need to get them.

How to forecast your fundraising till you exit calculations 1

How are you going to actually spend the money? I’m not making this a burden for you, I’ve split things into the main buckets of spend- G&A, R&D, S&M and separately shown paid acquisition (I presume you buy each customer- you can decrease your blended CAC if you have a lot of organic).

Put in the rough % per bucket. Assume you will spend more on developers at the start and then you are going to spend more on customer acquisition at growth stages.

You can then put in the average salary for each category of staff (more expensive over time) and what portion of the total cost is staff (so if 70%, you assume 30% is on everything else like office, laptops etc). Now your fundraise has been put into the context of headcount. Does 140 staff make sense at the stage you are at and your business model? Do you need more or less staff? Maybe you have raised too much.

How to forecast your fundraising till you exit calculations 2

Here we can see your planned runway for each round. From that, we derive your monthly burn rate which is net of revenue that you generate (We add your revenue to the raise so you can spend more money!).

The final thing you do is the forward math. We do the backward math above. The forward math is what you actually plan on doing. You review the backward math and then just pick your growth and funding raises and that’s your actual plan from here on.

How to forecast your fundraising till you exit calculations 3

The backward chart shows your backward calculated plan that I used to do with pen and paper. It shows how much you plan on raising, your growth multiple to the next round and your revenue.

Excel crashed on me when I was making this. I had to redo it… FML.

How to forecast your fundraising till you exit Backward math

The forward chart is the same as the backward one, but it shows your actual plan. They should ideally look the same

 

How to forecast your fundraising till you exit forward math

The final sheet just helps you see how much you need to grow to get to what revenue level, to help you think of growth multiples when picking yours.

There is a heuristic for SaaS companies called 2T3D. I actually blog 3T2D since I think $1m is a good place to start from. These days, you need about $1.5m for a series A in SaaS, so 2T3D on $1.5m makes sense to get you over the $100m mark.

 

Growth rates

I just found this chart from the  KBCM Technology Group 2017 SaaS survey which I think is interesting to use as a heuristic.

We can see when you have hit $5m ARR you are spending about $1.8 to get a $1 of revenue. Somewhat strangely as CAC normally goes up, you spend $0.82 for 1 $1 of revenue.

capital-efficiency

This chart shows you some calculations. Generally, the cash to dollar ratio goes down over time. When you are looking at how much money you need to raise to hit your revenue targets, these might be useful as a guide. One thesis for why CAC is effectively decreasing is that paid spend is being used more effectively and scales onto the fixed staff base. I don’t have data to know.

capital-consumption-ratio

Conclusion

This tool may seem like a pain in the neck to do, but the hard work has been done for you. It is a critical exercise every founder building a venture-backed company should complete though. The clarity in the path forward is worth the hour or two you spend on it. Just do it. Share it with your investors. See if they have the same vision of the future as you do. And when investors ask you why you are raising $500k, you have a really solid answer that will resonate with them.

If you love this tool, please share it with other founders so they can benefit too. That would be cool! I appreciate you.

Download the model here

You’ll be asked to confirm you want it in the email sent. Hit download in the email and you got it. It’s an automated system. And btw… if you respond to an email to share love, it goes to my inbox.

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