5 things you should know when pricing your seed round
Gaurav Jain is a Principal at Founder Collective, one of the most active seed funds in the country. Follow him on Twitter @gjain.
Pricing Your Seed Round
Pricing your seed round is more of an art than a science.
Of course, there are some benchmarks and comparables, but every startup is unique, and it’s easy for entrepreneurs to feel a little confused. Most entrepreneurs understandably fixate on the dilution impact of pricing their startup. But price can have much larger ramifications (good or bad) for your startup.
Based on my experience both raising a seed round for the company that I founded and now investing at the seed stage, here are 5 things to keep in mind:
Don’t attract the wrong investors
There are investors out there whose strategy to get into a round is to simply “pay up.” These funds will find the companies getting the most hype and bid aggressively. Remember that unlike the public market, seed-stage investors have to add value beyond just financial capital. The highest bidder is not always the best bidder. If anything, there is probably a negative correlation because the highest bidder is trying to buy into the round because they can’t get in otherwise. You should ask a simple question of yourself: would you still let this investor into your round if they paid 25 percent less? If the answer is no, then you may want to think again.
But price indicates quality
Ever bought a more expensive item because you perceived it to be of higher quality? As consumers, we generally believe in the theory that “you get what you pay for.” VCs are consumers too, and they are buying part of your company. There is not much information available to a seed-stage investor in terms of financials and metrics, so we are constantly looking for signals and proxies to help inform our decision. Too low a price can be a “turn off” by suggesting a low quality opportunity. I know most VCs won’t openly admit it, but it’s true. Make sure you keenly understand what valuation your peers are getting so you are not underpricing yourself. At the very least, you want to fall in a reasonable range so you don’t set off any alarms.
Be wary of a down-round
Entrepreneurs by definition are huge optimists. When you are raising your seed round you probably don’t even consider the possibility of a down round, a future round where your valuation is lower than the previous round. Unfortunately, it happens. Especially if the economy takes a bad turn and risk capital dries up. Turns out it’s hard to predict when or …