Today’s Pill (8): How much should I sell?

I had this discussion two days ago, with the co-founder of a nascent, local ML startup building a MVP to be in its first market this summer. They’ll make €20k this year, still getting feedback and iterating, and plan a 10x growth next year; they’re generating traction, and will be on breakeven at any time. At a 5–8x EV/NTM rev multiple, and a pre-seed round of €200k (one year till the next liquidity event,) you only want to sell max. 20% of your Co, and then stick by the max. 20% at each round. Assuming your pre-seed goes ok, by the end of next year you’ll be with the investors. One danger: the inflated valuation.

Startups may run out of money, but don’t let an over-inflated valuation be the cause of your failure. You could have product-market fit, a viable, agile biz model, and still wind down due to an inability to raise because of an inflated valuation. And even if the investor lures you with a “fabulous” estimate, the more money might not help when the Co grows and you switch from the “garage” to a culture with roles. You don’t want to sell a higher % in the round, as you risk not having enough equity in the later rounds for investors, and they’ll pass; investors also do notes, and you risk having an unfixable cap table.