Seed Fundraising — How to Gradually Increase your Valuation

When you begin seed fundraising, it’s often very difficult to know what price you should set for your “valuation cap” on a SAFE or convertible note. I often suggest founders start with a low valuation cap and then increase it over time, based on demand. Here’s how the approach works:

Create Scarcity

Even when you’re just beginning your fundraise, you can create scarcity and push investors to a quick decision:

  1. Start with a slightly lower valuation than the current market standard, I usually advise a $3–6M valuation cap range, with the top end for startups raising in Silicon Valley (this would be for a seed stage company at ~$100k ARR, with ~15% month/growth).

Build your Ladder

Once you’ve hit your initial target, you’ll want to increase the valuation cap, reducing your dilution as you take on additional capital. There’s a few ways to do this:

  1. My recommendation: increase the valuation cap in $2M increments. After you’ve raised your first $250k. You increase your valuation cap by $2M, so it would now be $5–8M. I then recommend you restrict the amount of investment available to $500k in each increment, going up to a $12M cap maximum, to avoid high valuation problems in the next round.

Handle Objections

Despite understanding “supply and demand”, plenty of investors will not be happy about paying a higher price than someone else who invested very recently. When they push back, you can respond with the following reasoning:

  1. Blame a third party, such as a promise to your team or other investors. For example, “I promised the team they wouldn’t take more than 20% dilution this round” or “My largest investor is pushing me to only take 20% dilution” .

Few founders can realistically be expected to guess the correct valuation for their startup’s seed round. Starting low and increasing your cap, based on demand, removes the guesswork and increases your chances of a good outcome.

Thanks to Kaego Rust for their help with this article.
Photo by
Jukan Tateisi

Sterling Road invests in pre-seed B2B startups based in the US and Canada.
Full process here:
sterlingroad.com/process.
You can reach me here:
ash@sterlingroad.com

Pre-seed Investor. Email: ash@sterlingroad.com. B2B, US only. I work with founders for 3 months before investing. More info: http://SterlingRoad.com/process

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