Balancing the size of your raise with dilution

At BSV, we frequently look to the ratios and statistics of public companies to guide our thinking for startups.  The theory is that large cap public companies are clearly successful (after all, they’ve gone public on a real exchange), so startups would do well to emulate them.  In this case, we looked at public tech company financials to understand how many years of cash a startup should have when it’s burning cash.  The numbers are staggering.

 

$ in MM's   TTM TTM  TTM      Years of 
Company Ticker Revenue EBITDA OCF Cash   Cash
Marketplaces              
Zillow Z $741 $7 -$54 $420   8 Years
               
Content Distributors              
TrueCar TRUE $264 -$34 -$1 $103   115 Years
Netflix NFLX $7,620 $314 -$896 $1,830   2 Years
Pandora P $1,290 -$159 -$118 $293   2 Years
               
Median   $1,290 -$34 -$118 $293   2 Years
               
SaaS              
2U TWOU $177 -$22 -$4 $188   50 Years
Benefitfocus, Inc. BNFT $212 -$36 -$35 $68   2 Years
Box, Inc. BOX $327 -$156 -$38 $183   5 Years
Castlight Health, Inc.  CSLT $82 -$77 -$58 $121   2 Years
Five9, Inc.  FIVN $145 -$5 -$1 $58   64 Years
Hortonworks, Inc. HDP $155 -$219 -$98 $109   1 Years
Jive Software, Inc. JIVE $202 -$14 -$10 $108   11 Years
Lifelock LOCK $632 $35 -$38 $156   4 Years
Marketo, Inc. MKTO $241 -$51 -$4 $100   26 Years
MobileIron, Inc. MOBL $158 -$65 -$35 $85   2 Years
Secureworks SCWX $362 -$57 -$18 $124   7 Years
Appfolio, Inc. APPF $90 -$8 -$2 $22   14 Years
Twilio TWLO $219 -$30 -$2 $261   164 Years
Instructure INST $92 -$48 -$21 $62   3 Years
Mindbody, Inc MB $120 -$24 -$13 $88   7 Years
Xactly XTLY $81 -$17 -$7 $46   7 Years
               
Median   $167 -$33 -$15 $104   7 Years
               
*OCF defined as Net Income + Depreciation and Amortization, Total + Other Amortization + 
Other Non-Cash Items, Total + Change in Working Capital        

 

We follow 80 public tech companies, but for this analysis we only show the 20 that are burning cash.  On median, depending on the sector, the data show that a cash burning public company will hold 2 years of cash if it’s in the Content Distribution Space and 8 years of cash if it’s SaaS or a Marketplace.  That’s a massive cushion, especially relative to the 12 to 18 months of cash we typically see startups raise each round.  So should startups be raising 2 to 8 years of cash each round? Not necessarily. 

 

The reason these public companies hold so much cash on their balance sheets is because that cash was raised at very high valuations so dilution was minimal.  However, if you’re a Series A company, your valuation probably falls somewhere between $5mm and $15mm (pre-money), not hundreds of millions or billions like these publics, so raising 2 years of cash if you’re burning 6 figures per month can be painfully dilutive.  In this case, emulating public companies isn’t optimal and raising 2 to 8 years of cash is overkill.  To better understand the dilution impact, the table below shows how much dilution you would absorb if you raised cash at a certain pre-money valuation.  For instance, if you have a pre-money valuation of $10mm and raise $3mm of cash, you’re going to dilute yourself and current investors by 23% (3/(10+3)). 

 

              Pre- Money Valuation        
    $5,000,000 $6,000,000 $7,000,000 $8,000,000 $9,000,000 $10,000,000 $11,000,000 $12,000,000 $13,000,000 $14,000,000 $15,000,000
  $500,000 9% 8% 7% 6% 5% 5% 4% 4% 4% 3% 3%
  $1,000,000 17% 14% 13% 11% 10% 9% 8% 8% 7% 7% 6%
  $1,500,000 23% 20% 18% 16% 14% 13% 12% 11% 10% 10% 9%
  $2,000,000 29% 25% 22% 20% 18% 17% 15% 14% 13% 13% 12%
Raise $2,500,000 33% 29% 26% 24% 22% 20% 19% 17% 16% 15% 14%
  $3,000,000 38% 33% 30% 27% 25% 23% 21% 20% 19% 18% 17%
  $3,500,000 41% 37% 33% 30% 28% 26% 24% 23% 21% 20% 19%
  $4,000,000 44% 40% 36% 33% 31% 29% 27% 25% 24% 22% 21%
  $4,500,000 47% 43% 39% 36% 33% 31% 29% 27% 26% 24% 23%
  $5,000,000 50% 45% 42% 38% 36% 33% 31% 29% 28% 26% 25%

 

The table below refines the analysis a bit further, showing you much incremental dilution you absorb if you raise an additional $500k of cash.  For instance, if your pre-money is $10mm, every $500k you raise will dilute you by 5%.

 

              Pre- Money Valuation        
    $5,000,000 $6,000,000 $7,000,000 $8,000,000 $9,000,000 $10,000,000 $11,000,000 $12,000,000 $13,000,000 $14,000,000 $15,000,000
  $500,000 --- --- --- --- --- --- --- --- --- --- ---
  $1,000,000 8% 7% 6% 5% 5% 4% 4% 4% 3% 3% 3%
  $1,500,000 6% 6% 5% 5% 4% 4% 4% 3% 3% 3% 3%
  $2,000,000 5% 5% 5% 4% 4% 4% 3% 3% 3% 3% 3%
Raise $2,500,000 5% 4% 4% 4% 4% 3% 3% 3% 3% 3% 3%
  $3,000,000 4% 4% 4% 3% 3% 3% 3% 3% 3% 2% 2%
  $3,500,000 4% 4% 3% 3% 3% 3% 3% 3% 2% 2% 2%
  $4,000,000 3% 3% 3% 3% 3% 3% 3% 2% 2% 2% 2%
  $4,500,000 3% 3% 3% 3% 3% 2% 2% 2% 2% 2% 2%
  $5,000,000 3% 3% 3% 2% 2% 2% 2% 2% 2% 2% 2%

So how much cash should you raise? At BSV we like seeing a company raise at least 18 months because that gives you 12 months to really grow and then another 6 months to raise the next round if you need it.  Additionally, we’re believers in over-raising, especially if you have a high enough valuation: if you’ve valued at a $10mm pre-money and raising $3mm, the safety net of raising an extra $500k (17% more cash) is worth the incremental ~3% dilution. After a successful exit, no entrepreneur ever kicks themselves for raising incremental money, so err on the side of caution and take a little more cash than you need.       

Blossom Street Ventures. All Rights Reserved.
Web Site Design by Idealgrowth