Anthony Corletti – On Raising Money

Let's say we're fundraising for our new software company.

We want to raise $10 million because we think that will help us reach our goals and get the company to it's next major phase of growth. 🚀

So what's our company worth? This is our "pre-money" valuation. Think about your assets; customers, sales volume, people, infrastructure, distribution.

Let's put a value on that, let's say it's $1 million.

So we can say that we're raising $10 million on a $1 million pre-money valuation.

This means our post-money valuation is the sum of what we're raising and our pre-money valuation, which is $11 million.

Wow! So what does this mean?

This means you just sold ~91% of your company 🤯

The percentage sold of your company ( $P$ ) equals the amount you raised, divided by the post money valuation.

P = 100 \times \frac{raised}{raised+pre}

Now what about these things called interest rates that everyone talks about? Does that affect my fundraising?

Yes, indirectly. Interest rates can affect the valuation of a company and the terms of the investment.

For example, consider things like the cost of capital and discount rates. When interest rates are low, investors may be more willing to invest in riskier assets like stocks or equity, which can drive valuations for technology companies. When interest rates are high, investors may prefer safer investments, such as bonds which can lower valuations for technology companies.

When calculating the value of a company, models like discounted cash flow (DCF) can be used to calculate the present value of future cash flows. Discount rates in those models are often based on interest rates and reflect how risky an asset could be. Higher interest rates usually result in higher discounts, which lowers present valuations of future cash flows.

Don't forget that your investors are humans too, and interest rates can affect appetite for risk and opportunity cost. Think higher opportunity cost with high interest rate, which could lead to lower valuations (which isn't necessarily a bad thing).

The next time you read or hear about a company raising capital, try doing this calculation with a few numbers in the same ball park, and infer how risk appetite might be set given current events and various rates in the market. You might find yourself noticing patterns.