As founders want to scale their project to achieve the vision, whether they like it or not, a time will come when they have to raise funds. There are enough valuation models that value a web3 startup using fundamentals such as Discounted Cash Flow (DCF) analysis, EV/ Revenue (Revenue Multiple), and many more. All the mathematic valuation models are applicable only once the project has some numbers to show and are standard methods used while valuing later-stage companies. When it comes to pre-seed or seed valuations it is more of an art of valuing a project.
This research piece is not going to teach founders how to value their projects but the data and insights can put into perspective how the most successful projects from India raised their pre-seed/seed rounds and where they are today. To maintain confidentiality, we will not disclose the name of the companies as this can give out financial information of certain individuals.
A “successful” project in this paper is a project that has grown at least 12x in valuation since its pre-seed valuation to date.
Let’s begin.
Round Size
There are enough and more examples of great projects raising less than $1M very early and becoming extremely valuable protocols today. Pre-Seed/ Angel round sizes are very small because there generally isn’t any hype and many a time are pure founder bets.
Round sizes at this stage must be carefully tailored to give the project enough runway for anywhere between 18-24 months. The follow-on rounds may come sooner based on hyper-growth or pivot scenarios.
When we looked at the data we gathered, we noticed the following:
The largest pre-seed round of any of the projects raised was $1 Million
The smallest pre-seed round among the projects was $250k
The average pre-seed round size sat at $591k
The median pre-seed round size was $500k
A project can raise more money, but it definitely can affect dilution. Many founders try to take advantage of the lack of a mathematical model to value pre-seed projects and try to quote high valuations to reduce their dilution in the project. This can become an issue in the future if the project cannot live up to its valuation before raising the next round, and can face devaluation.
Let us look at valuations in the next section
Valuations
We now know that it is tough to value early-stage crypto companies. Many projects that are raising today use proxies of certain competitors who have raised at certain valuations and add and subtract premiums and discounts from it. Most don’t even do that. Some projects throw out a high random number, dutch auction style, and keep discounting until at least one investor is interested in a particular valuation.
In all this chaos, we noticed a certain pattern. In the projects that we studied:
- Not a single company raised at a valuation greater than $10 Million.
These projects constitute less than 20% of all the successful projects that we spoke to. These projects could raise at this valuation only because they had incredible traction from their early communities.
Read more on building early communities here. - The average pre-seed valuation was $6.62 Million
- The median pre-seed valuation was $6 Million
- The lowest pre-seed valuation was $5 Million
(This is in no way an indicator to value a project at a minimum of $5 million. The projects that raised $5 million already had either good community traction, a seasoned founder, or advanced technological moats)
With the average value and the median value both similar, it shows that the consistency of all these projects raising close to a $6 million valuation
Dilution
Dilution is something that keeps founders up at night at the time of a fundraise. A higher valuation will mean lower dilution, but most of the time there are no numbers. Investors are rarely fixated on dilution but always look for a lower pre-money valuation to maximize their returns in later rounds.
Here is some data we found among all the projects:
- The maximum dilution noted was 13%
- The minimum dilution noted was 5%
- The average dilution stood at 9%
- The median dilution stood at an even 10%
Once again, we see the average and the median being very close to each other indicating a pattern of a dilution between 9-10% being a healthy one
Return on Investment
The investors see this as a return on capital investment while the founders see it as a return on the investment of their blood, sweat, and tears. All in all, it’s what every stakeholder looks for. Investors always have the chance to realize a return on investment earlier, but the ones who delay this gratification have seen immense returns on their capital investment.
From the projects we studied, if a pre-seed investor held onto their investment from the pre-seed round until the 19th of July 2022, here are the top 4 capital returns that pre-seed investors could have realized from certain Indian projects:
- Project A: 96x (19 months since pre-seed raise)
- Project B: 22.9x (51 months since pre-seed raise)
- Project C: 14.6x (6 months since pre-seed raise)
- Project D: 7.1x (16 months since pre-seed raise)
These are returns on investments measured on the 19th of July 2022, in which we were in the middle of a bear market. Some of these projects could’ve provided a much higher return when the markets were more bullish.
Conclusion
While founders struggle to value their projects at pre-seed stages, we have seen a pattern in the fundraising events around valuation and dilution. This piece of research is just a reflection of what successful Indian projects did in their early fundraising stages and is in no form to be used as gospel to value a project. Founders must always have a mind of their own and must come up with fair valuations for the benefit of all the stakeholders involved, i.e the community, the investors, and themselves with everybody’s incentives being aligned.
In part 2 of this paper, we will talk about how these founders arrived at these valuations while raising their pre-seed round.