Goldilocks Zones for
Seed and Series A Fundraisings
A guide to the interaction of key elements for your Seed and Series A equity fundraises.
Understanding Seed and Series A Equity Funding Rounds
​​
​Equity funding rounds are critical milestones in the growth journey of startups. Two of the most significant early-stage funding rounds are the Seed and Series A rounds. Understanding how these rounds work, including the interaction between fundraising amounts, valuation, cash runway, cash burn, and sales growth rate, is essential for founders looking to navigate the complex landscape of startup financing and set appropriate terms for angels investors and VCs.​
Series A Funding Rounds
​
Series A is one of the hardest funding rounds to achieve. Only about 15% of startups will make it to this stage of funding, aimed at scaling the business. This round allows startups to expand their market presence, refine their product, and significantly grow their user base. Series A fundraising amounts can vary widely from £1 million to £20 million, with a typical Series A round in the UK being between £1 million - £5 million.
​
Valuation & Dilution
​
By the Series A stage, valuations are substantiated by traction, user metrics, and revenue; reflecting the startup's progress and market potential.
​
VCs will typically expect 15-25% of the equity in return for their investment, with Series A valuations usually falling between £10 million and £25 million.
Cash Runway
The cash runway in a Series A round is designed to last 18-24 months. This period should be sufficient for the startup to achieve substantial growth, improve its product, and prepare for subsequent funding rounds.
Cash Burn
​
With more capital, the cash burn rate will increase, but this is expected as the company invests in scaling operations, hiring talent, and accelerating marketing efforts. Managing the burn rate is crucial to ensure the company doesn’t run out of funds before reaching the next milestone.
Sales Growth Rate
By the Series A stage, investors expect to see a solid sales growth rate. Demonstrating consistent revenue growth and a scalable business model is critical. Startups must show they can turn initial success into a larger, sustainable business.​​
​
​
​Goldilocks Zones: The Interaction of Key Factors for Series A rounds
​
​Fundraising Amount and Cash Runway
​
The fundraising amount is set to enable the company to have a runway of 18 months assuming sales growth, or 12 months based on the current level of cash burn.
Valuation & Dilution​
​
VCs will want 15-25% of the company in return for their investment, with valuations for Series A in the UK typically between £10 million - £25 million; and will want to see sales traction to underpin these valuations. Whilst the sales valuation multiples may be broad, and can vary significantly due to market conditions and business type, we've used a range of 4x-8x sales for an asset-light, scalable business. (Sought after B2B SAAS companies can get valuations of 15-20x or more though!)
Sales Growth Rate and EBIT Margin
​​
The 'Rule of 40' states that annual sales growth rate plus the EBIT margin should equal 40. In the diagram, we've used a Rule of 50 - startups with a EBIT margin of -100% should be aiming for an annual growth rate of 150%. These figures can be volatile for early stage startups though, so should be treated with caution.​
​​
​Seed Funding Rounds
​
Seed funding is typically the first official equity funding stage. This round helps startups develop their products, conduct market research, and build an initial product or service and user base. Founders may conduct multiple seed rounds depending on the nature of the product or service they are creating, and the market they are serving.
​
The fundraising amount for seed rounds generally ranges from £100,000 to £2 million, depending on the industry and specific needs of the startup. The median fundraise for seed rounds in the UK is £400,000-600,000.
​​
Valuation & Dilution
​​
At this stage, valuations are often based on potential rather than actual revenue, and sales metrics may not be particularly meaningful. Investors are backing the vision and the founding team’s ability to execute.
However, the equity dilution will typically be in the range of 8-20%, giving seed stage valuations from £1 million to £10 million depending on the amount raised and investor appetite.
​
Cash Burn
Cash burn is the rate at which a startup spends its capital. At the seed stage, burn rates should be managed carefully to extend the runway. This involves balancing expenses on development, marketing, and operational costs. Founders may look to release MVPs (minimum viable products) quickly to ascertain market feedback and iterate product design.
​
Cash Runway
​
The cash runway refers to how long a startup can operate before needing more funding. With seed funding, the aim is usually to secure enough capital to last 12-18 months, assuming sales growth during the forecast period, allowing time to reach key milestones that will attract Series A investors. Or looking at the current monthly cash burn, a cash runway of 9-12 months is desirable.
​​
Sales Growth Rate
For many seed-stage startups, significant sales growth is not yet the focus. Instead, the emphasis is on validating the business model, exploring product-market fit, and generating initial revenue streams.​
​​
​Goldilocks Zones: The Interaction of Key Factors for Seed rounds
​
​Fundraising Amount & Cash Runway​
​​
The amount of money sought should be consistent with giving your company 12-18 months runway allowing for some sales growth (12 months based on current levels of cash burn). A cash burn in the region of £40,000 - £50,000 is viewed as acceptable for Seed rounds, meaning a funding amount of around £500,000.
Dilution & Valuation​
​
Angel investors and Seed funds wanting 8-20% of the equity will drive a valuation in the range of £2.5 million - £6 million.
Sales Growth Rate & Valuation Metric​
​
At the seed stage the monthly sales level and sales growth rates are less important, so while there is still an interrelationship with other metrics, it is a secondary matter.​
Summary​​
​​​
​In summary, understanding the dynamics of seed and Series A funding rounds is crucial for startup founders. Balancing fundraising amounts, valuations, cash runway, cash burn, and sales growth rate can make the difference between a startup that is able to raise funding successfully and one that struggles to attract investors. Whilst setting a valuation or a fundraising amount can appear to be more of an art than a science, the interaction and interrelationship of key parameters will create helpful boundaries for many startups looking to fundraise.