Fundraising math
I often see people envious of entrepreneurs raising large rounds. They seem to often forget or not know how the math works for the investment to make sense.
For early rounds, a startup typically gets valued at 3 or 4x the amount they raise, which means it needs to exit for at least 3 or 4x the round size for investors to just breakeven on their investment.
And for investors to get a meaningful return on their investment, they need to exit another 3 or 4x the valuation they invested at, ideally much more.
Which means for the math to work for an investor — and thus, usually, a founder — you typically need to exit at ~10x the money you raised.
So say you raise $10M, it will typically be at a $20M to $30M pre-money valuation — for a dilution between 25% and 33% — which means a $30M to $40M exit for a ROI of zero, and a $100M exit for a ~3x ROI.
So raising 10 is a “liability” to exit at 100. And exits at or above 100 are rare. Keep that in mind when you see large rounds happening or consider raising with institutional investors.
