Valuation & Funding of Startups: Funding rounds
Valuation & funding of start-ups: Funding rounds
Joris Kersten, Place: Uden/ Netherlands, March 3rd 2020
Consultant & Trainer Joris Kersten
I am an independent M&A consultant and Valuator from The Netherlands.
In addition, I provide training in “Financial Modelling”, “Business Valuation” and “Mergers & Acquisitions” all over the world (New York, London, Asia, Middle East). This at leading (“bulge bracket”) investment banks, corporates and universities.
I also provide inhouse training on request (globally). Email for availability to: info@kerstencf.nl
And I have open training programs in business valuation in The Netherlands and different places in the world (e.g. New York, Mumbai, Dubai, Amsterdam and Uden).
My full training calendar can be found at the very end of this article.
And my next upcoming training is: Business Valuation & Deal Structuring @ Uden/ The Netherlands @ 18, 19, 20, 21 and 23, 24 March 2020.
Visit for all info and registration: www.joriskersten.nl
In addition, I write blogs and articles on business valuation related issues, earlier blogs can be found at the very end of this article.
The topics of my blogs consist out of:
1. The valuation football field;
2. Discount rates & WACC;
3. Net debt;
4. Wall street;
5. Financial modelling;
6. Start-up funding & valuation;
7. Financial statement analysis;
8. Financing M&A transactions;
9. Bonds.
Start-up funding rounds: An introduction
I am often asked about the funding & valuation of start-ups.
In this blog I will give an easy overview of the funding rounds:
· Sweat equity;
· Bootstrapping;
· Friends & family;
· Self-funding;
· Incubator funding;
· Seed funding;
· Bridge rounds;
· Series A.
The source I have used for this blog is the following book:
· Angel: How to invest in technology start-ups (2017). Jason Calacanis. Publisher: Harper Collins Publishers.
Jason Calacanis is a successful angel investor & entrepreneurs himself. This makes the book brilliant since it is very, very practical! 😊
Additionally, this guy is brutally honest, though and to the point. Hate it or love it, I personally really like the book.
Early staged funding
The first round of funding in many start-ups comes from the founders themselves. This in the form of working in their own business for free for months.
And because of this it is called “sweat equity”.
A variation on “sweat equity” is called “bootstrapping”. Bootstrapping basically means that you use whatever resources in order to finance your business.
For example you might be able to find a client who is willing to finance the company a little.
And then there are the “friends & family” or there is “self-funding”.
With self-funding this is a very strong signal for potential investors. These investors are then straight away interested in how & why an entrepreneur is doing that. So at least you will get attention.
(Jason Calacanis, 2017)
Early staged funding: Incubators
And then there are the well know “incubators”.
Start-up entrepreneurs can also join an "incubator" or "accelerator" in order to get financing.
The financing will range from 25,000 USD to 150,000 USD in early staged/ seed funding. And this for 5-10% of the shares.
These incubators are focused on different industries like: healthcare, hardware, software, mobile etc. And they are focused on different regions in the world.
At Silicon Valley the incubators only have become popular since about 2007. And they are partly responsible for the explosion in the number of start-ups around.
(Jason Calacanis, 2017)
Seed & angel funding
Most founders get to their seed financing round by completing successfully 2 or 3 of the “early stage” funding strategies discussed above.
Although it is possible that some founders skip the “early stage” funding strategies completely.
In this case, think of a start-up in a market that is really “hot”.
Like for example when you built a really nice app in the on-demand space in 2014-2015.
Uber and Airbnb were really hot in this time period, and it was then possible to raise 1.5 million USD in seed funding straight away.
Also founders who sold their former start-up to google or facebook are often able to get to seed funding straight away.
This since the market believes they understand the startup-game. And this way they can attract seed financing with simply a basic prototype or slide deck.
(Jason Calacanis, 2017)
Bridge round, aka “seed plus”
A seed startup can run out of money before having reached the targets needed for a VC firm (venture capital) to fund a “series A” round.
Or they can run out of money before they reach “break even” or get profitable.
And then these start-ups can undertake what is called a “bridge round”.
This round of funding is typically performed by the same investors as who did the seed round. Since these investors will simply lose their money if they don’t continue investing in the startup.
(Jason Calacanis, 2017)
Series A
The series A is the most important round for a start-up, because this is typically done by a professional VC firm.
These VC firms will join the board of the company. And they will also create a good “governance” structure in the start-up.
And a governance structure simply means that from then on there will be a board of directors. And these will have regular board meetings.
These meetings will result in "board resolutions" all with an eye on maximizing the shareholder value of the start-up.
After a successful series A, subsequent rounds will follow: B, C, D, E, F and mezzanine.
(Jason Calacanis, 2017)
I hope you liked this introduction in “funding rounds” for start-ups.
In the upcoming weeks/ months I will write a lot more on valuation & funding of start-ups.
Topics that I will cover are:
1. Start-up valuation;
2. Convertible debt;
3. Stock options;
4. Founder equity splits;
5. Cap tables;
6. Term sheets.
And please let me know whether you want to see back other topics as well: info@kerstencf.nl
Source used for this blog
The source I have used for this blog is the following book:
· Angel: How to invest in technology start-ups (2017). Jason Calacanis. Publisher: Harper Collins Publishers.
Jason Calacanis is a successful angel investor & entrepreneurs himself. This makes the book brilliant since it is very, very practical! 😊
Additionally, this guy is brutally honest, though and to the point. Hate it or love it, I personally really like the book.
Earlier blogs on “net debt” (cash & debt free)
Article 1: Valuation: Introduction to "net debt" (cash & debt free)
Article 2: Valuation: Net debt (cash & debt free)
Article 3: Valuation: Adjusted net debt – Cash like items
Article 4: Valuation: Adjusted net debt – Debt like items
Earlier blogs on “various topics”
Financing a M&A transaction: An introduction
Earlier blogs on “bonds”
Article 1: Bonds - An introduction
Earlier blogs on the “cost of capital”
Article 1: Valuation & Betas (CAPM)
Article 2: Valuation & Equity Market Risk Premium (CAPM)
Article 3: Is the Capital Asset Pricing Model dead ? (CAPM)
Article 4: Valuation & the cost of debt (WACC)
Article 5: Valuation & Capital Structure (WACC)
Article 6: International WACC & Country Risk – Part 1
Article 7: International WACC – Part 2
Article 8: Present Values, Real Options, the Dot.com Bubble
Article 9: Valuation: Different DCF & WACC techniques
Article 10: Valuation of a company abroad
Article 11: Valuation: Illiquidity discounts, control premiums and minority discounts
Article 12: Valuation: Small firm premiums
Earlier blogs on “Business valuation to Enterprise Value”
From June until August I have written the following blogs on valuation:
1) Leveraged Buyout (LBO) Analysis:
2) M&A Analysis – Accretion/ Dilution:
3) Discounted Cash Flow Valuation:
4) Valuation Multiples 1 – Comparable Companies Analysis:
5) Excel Shortcuts & Business Valuation:
6) Valuation Multiples 2 – Precedent Transaction Analysis:
Earlier blogs on Wall Street
Article 1: Wall Street – A general introduction
Article 2: Wall Street – The Federal Reserve banking system
Earlier blogs on Financial Modelling
Scoping a financial model built primarily for business valuation:
Training agenda Joris Kersten:
- Financial Modelling in Excel (5 days): 2, 3, 4, 5, 6 February 2020. Location: Riyadh/ Saudi Arabia;
- Business Valuation & Deal Structuring (6 days): 18, 19, 20, 21 and 23, 24 March 2020. Location: Uden/ The Netherlands;
- Financial Modelling in Excel (4 days): 20, 21, 22, 23 April 2020. Location: Uden/ The Netherlands;
- Business Valuation & Deal Structuring (5 days): 22, 23, 24, 25, 26 June 2020. Location: New York City/ United States.
- Business Valuation & Deal Structuring (5 days): 19, 20, 21, 22, 23 July 2020. Location: Dubai/ United Arab Emirates.
- Business Valuation & Deal Structuring (5 days): 3, 4, 5, 6, 7 August 2020. Location: Mumbai/ India.
- Business Valuation & Deal Structuring (6 days): 28, 29, 30, 31 October 2020 + 2, 3 November 2020. Location: Amsterdam/ The Netherlands.
- Financial Modelling in Excel (4 days): 16, 17, 18, 19 November 2020. Location: Amsterdam/ The Netherlands.
All info on these open training sessions can be found on: www.joriskersten.nl
And 130 references on my training sessions can be found on: www.joriskersten.nl
Physician | Founder & CTO of EW2Health | A.I. & technology for data driven health promotion
4yNice article! We are a living testimony.
Professor of Finance, Bayes Business School of City University London UK
4yInteresting survey.
Author | AI-Enthusiast | External Think Tank | HBR Advisory Council |
4yA very nice piece, Joris. This gives some inside view to the whole fundraiser process which many startups are unaware of. Thank you!
Serial Entrepreneur who helps business leaders to scale their business to 6 & 7 figures with ease customizing the business to them
4yGuillaume Kloof thanks for bringing this article to my attention. I think this gives a very clear overview of the funding stages for startups and also insight how they should lead upto series A round. Joris Kersten, MSc BSc RAB I'm definetly looking forward to the articles about convertable debt, stock options and founders equity splits as I really feel like this is a black hole for many startups, and such an important topic for those who are starting their fundraise!
Strategic Operations Leader | Shaping a Better Future with Technology, Values & Vision
4yThank you again Joris Kersten, MSc BSc RAB