First decide if the person writes checks of $750K or less.
If it’s less than a $750K check:
If you are pitching angels or institutions writing a check of $750K or less, you should lead the round for them. You should have a Note or SAFE that you are raising under, and drive urgency to get them to invest under that note.
The lead for the SAFE or Note is whoever you’ve gotten to date to have written the largest check on that SAFE or Note. If you have no one, you can use Alchemist as the lead and use the Alchemist note, and the Alchemist valuation as the cap.
The big issue with checks these smalls is you need to drive the process. You need to create structure. As a default, you can use the Alchemist note as a lead note if you don’t have another investor who invested under that. We like the snowball strategy here. Start with a small confined raise -- e.g. that you are only raising $250K from angels / investors who write small checks. (Note: you can say you are raising more for the whole round to allay fears that you aren’t raising enough -- e.g. that you are raising $1m total -- but that you are reserving just $250k for individuals / small checks, the rest is for an institution).
Once you close your first $250K, you can then double the amount you say you are raising. E.g. Say we are raising $500k, and have closed $250K. So you are always half-way done. Once you hit $500K, you can double to $1m when talking to angels.
In general we like the strategy of diluting by 10-15% and then doubling the cap. E.G., raise $750K on the $6m cap, and then double the cap to $12m and raise your next $1.5m, then double to $25m, etc.
If it’s greater than a $750K check:
Now you are talking to institutions. It’s a different strategy to employ. This may be confusing. The reason why it’s different is that with angels / small checks you need several, and you need to drive urgency. With big checks, you only have room for 1 or 2 large checks, and you want to be accommodating in the beginning to make sure they invest the time to get you a term sheet, and then -- and ideally with other offers -- we can negotiate back.
So, what’s your valuation when talking to an institution? You don’t have a set valuation. You are much more interested in finding the right partner. And the valuation you are open to for what is right with the partner. If they ask, you don’t want to answer that question because however you answer it it will not open up more possibilities but just close doors for you if it’s not in range with what the institution is thinking. You really want them to set the valuation and then you will negotiate back AFTER they have gone through the process of doing all of their diligence and are vested in doing the deal. If you set a valuation early in the process -- and they think it’s out of range -- they will stop the process there and not move forward with diligence. If they have gone through diligence, gotten all their partners excited, and issued you a term sheet -- then they are suddenly invested in you and you will have leverage then to negotiate up the valuation (ideally with other term sheets in hand).
So if they ask what’s your valuation? The answer is “I don’t have a set valuation -- and I’m not really interested in that. I’m interested in finding the right partner that will best fulfill the mission of my business. And I am open to the valuation with the right partner.”
And how much are you raising?
For institutions, the amount they can give is NOT determined by your needs, it’s determined by their fund size. IN GENERAL -- and this a CRUDE approximation and not wholly accurate -- the typical check an institution writes on average is their fund size divided by 100. If you are talking to a $500 million fund, they typically like to write $5 million checks. For a $200 million fund, it might be $2 million checks. How do you know how large the fund is? Look them up on Crunchbase, or Ask them.
Now you can’t answer the question “how much are you raising?” by saying “it depends on your fund size.” your answer needs to reflect the needs of the business.
Also, larger funds have seed programs and they might not view you as mature enough to take their typical check, but might like you, and might want to get a sense of if you are open to a seed check.
Most founders are open to taking a range of raise amounts. However, if a VC asks you how much you are raising, you need to seem like you have a handle on what the business needs. But, you also want to create a flexible enough range that can accommodate what that VC might want to give you.
And so you need an answer to this question that is specific AND flexible. One approach we like is to give a range -- e.g. “I need $1.5m to take us out 9 months, and $4 million for the next 2 years.” This provides specificity and allows the VC to decide what size check feels comfortable to them. In general, a seed raise takes you out 9 months. A Series A takes you out 18-24 months.
You can also have a different approach. E.G., we have projected $6m but wanted to get your feedback on what felt right given your pattern recognition with other companies you have seen.
You can answer your last valuation if you have one, but if they want your current valuation, that's going to be set by the partner you work with on the round. You could ask what ownership they are looking for but assuming they are even slightly normal, it's ~20% for a serious round.
In general we advise starting with the larger number — eg 4m — with the larger funds, and then if they say they think you might be too early for that size check, then revert to saying you can also do a smaller raise to serial the business over the next 12 months.
So you can say we need 4m for the next 2 years. And we may also do a smaller raise now for the next 12 months to serial the business.