* If your company comprises a few founders/consultants, a great idea, a solid business plan, a working prototype, but none of you have a proven business track record, your typical pre-money valuation will be in the very low millions ($1 million to $3 million is typical). You should be looking for a seed round of $0.25 to $1 million. This is a difficult environment for you, and you should try getting some experience on your side

* If your team has a successful start-up track record, and if you have a 2-5 person management team with significant e-business or technology experience, your pre-money valuation jumps into the high single or low double-digit millions. $6 million to $15 million is the typical valuation range, and you should be looking for a first round of $3 to $10 million.

From: http://oz.stern.nyu.edu/startups/vc.html

I'd point out that they are no longer at the "prototype" stage, and have very respectable traction. Having users acts as a great substitute for "business experience". Thus the first category and valuation suggestion isn't really applicable.

Of course, it'd be even better if they had revenue. Revenue trumps all, and means that you're unarguably in the control position--no answer the investor can give can shutdown your business, if you have revenue sufficient to keep it rolling.

But, I think they've already proven they have a lot of the stuff investors look for...so, they're somewhere between your two suggestions even if they have no prior "e-business" experience.

It also sounds like they're very well-placed for a low-millions acquisition. Partners are the most likely acquirers, and there's a lot of websites that'd like to partner with a cool product like StormPulse (though it's cyclical, so this month it's hot, and it'll drop as the hurricane season dies down).

That suggests that the difference between management teams at this stage is worth $1m - $14m. Incentive for dummy managers?

This may sound odd, but 300k-500k is about the hardest amount of money to raise. You're still too small for institutional investors, and you're large for an angel round. A typical angel might put in anywhere from $25k-$100k. I'd guess $50k to be the median, meaning you're looking at having to find 6-10 people.

You're in good shape given your traffic and revenue, so I'm not trying to suggest that you won't be able to do it. Just be cognizant of the fact that it actually may be easier for you to raise $3 million than $3 hundred grand.

It's not impossible to put together an angel round that's $500k or more with angels, assuming a) there's enough interest, and b) early on, you get angels who are connected / influential and you get a pile-on effect. (That being said, it is very hard to do.)

Some have been able to pull together up to $1M or more in $50 to $100k chunks.

As Ivan mentions, VCs like USV, Charles River Ventures and Bay Partners also come to mind -- they can do $200-$500k seed deals in one shot, or syndicate with angels.

There does seem to be a step function in valuation though when you get to Series A -- but that's moreso because of the economics of the VC game. They want to put $x million in a Series A, and they want to leave enough on the table for the founders to keep working, so they work backwards from that to set a premoney valuation.

Right, nothing is impossible. It's just harder. You're limiting yourself to the 2 or 3 VC firms who are ever willing to do this, or large angel groups. Or, you have to get 10 or so people interested. That's probably even a little harder right now than it was when I was going through the process, as the money angels use to invest is often paid for by selling shares of something.

Or you can convince one VC firm out of pretty much the entire set to give you $3 million. Raising investing is a lot like dating. You try to get set up with (or find yourself) as many people as possible until you find yourself in a situation where you like them and they like you. And if your total dating pool consists of 3 VCs and 2 large angel groups, your chances aren't 0, but they're a lot less than they would be if the pool was everyone with an office on Sand Hill road.

There are, of course, strong arguments for not taking that much, I'm just pointing out that it's easier.

You're correct, but it is becoming more common for institutional investors to do a seed of $300-500K. Union Square and Charles River come to mind. This way, they don't miss out on early stage opportunities.

A little off-topic, but anyway:

I live in a non-hurricane part of the world, and as such have no particular interest in the phenomenon except for when it is covered in the news. I saw stormpulse here on YC news, and checked it out. Since the site is so well designed and a real pleasure to use I have often found myself going back to check up on hurricanes that appear halfway around the world from where I live.

You managed to get a regular visitor out of someone who has no particular interest in what you do, and that doesn't normally spend time just hanging out and doing nothing on the net. This is a big big accomplishment. And I think you deserve a big round of applause for having made such a well-designed site...

Thank you. That's incredible to hear and I hope we can continue to please.

We need to do more advanced metrics to capture this kind of behaviour (cohorts, stickiness).

keep going as long as possible as you can without VC -- in fact, you need to plan to do this and not bank on getting funding.

out of curiosity, with $500k how will you "expand your coverage and services" in a way that won't currently happen? Is there really a burning need for this money, or will most just be salary for you to go full-time?

with the little info I know (and my few life experiences) why not built out the viable revenue model while still in bootstrapping phase.

Yes, the money would be used to pay 2-3 full-time salaries plus office space and possibly incentivize some other development directly beneficial to us.

The only urgency is the cyclical nature of the industry; we'd like to be in a good position before the next season begins on June 1 2009.

Why not do convertible debt and not worry about your valuation?

http://www.entrepreneur.com/money/financing/startupfinancing...

There are a few varieties of convertible debt -- one is with a discount, and another is with a pre-money cap.

Lots of investors will insist on pre-money cap at a reasonable seed valuation. This basically means later when you do a series A or change of control, the investor's money converts with the Series A, and they get reimbursed typically with additional common stock that would simulate that valuation as if they did equity.

Straight up convertible debt with only a discount actually does NOT align the entrepreneur's goals with the investor... the investor gets a fixed percentage discount off the Series A price, but what if they put in $100k at year 0 and the company is now worth $10 million later at year 1 (rare but not unrealistic example)? That $20k profit with the 20% discount is starting to look like an awful move.

History lesson: Back in the day, notes were common just to really "bridge" startups from seed to Series A. They were issued to startups by the same VC that was already planning to do a Series A with them -- so the discount was fine because the VC would set the valuation as well. It's different now because your note investor (angel, friends or family) probably won't be the pricing your next round -- more likely, the market will.

Now it just doesn't make sense for most investors since they can take a chance on a team, do a note with a discount, and then see no significant return if the team is successful and raises the next round at a much higher valuation.

This article is actually kind of messed up because it assumes that you priced your round poorly, and then uses that as an explanation for why debt is good. If everyone is doing their job, and you're planning for success, then do a cap... or heck, do equity with YC's Series AA.

Personally, I would not go for capital on your site. I'd put some ads on there, expand the service somewhat, and in a while you'll be making a bit of money.

I disagree.

Raising $300k to $500k at a reasonable seed valuation makes a ton of sense for them -- if you get the right angels who can actually help you with connections and experience, the pie will get larger faster than the % of the pie you give up to get them.

Well, I won't argue. I've never lived in an area where I had to deal with anything like hurricanes or other wierd weather, so I know very little about that market and how much can actually be made from it.

Just as a point of reference. The weather channel and its website was valued around 3.5B at time of acquisition. This included a TV channel as well as some other resources, but it's a market.

I am actually looking forward to "smart money" as much for the smart as the money. We are encompassed with so many opportunities that it will be extremely helpful to have another vested party with significant experience to boot.

Value the company at $3million, raise the capital through two or three angels, giving away 15% of equity in total. Involving VCs could mean problems exiting later down the line. You don't mention if you came through YC - even if this is not the case, the company sounds like a YC startup, and so its worth targetting angel investors who have had successful exits with YC companies in the past.

No, we did not come through YC. We did attend Startup School 2007 and we did apply, but it wasn't to be.

Thanks for the advice; this is sort of what we have in mind.

Thanks everyone for the insightful and helpful answers.