Case 094Early-stage valuationWarm up

Sproutvik Labs burns Rs 1.5 crore a month, wants 18 months of runway plus a 20% buffer, and will not give up more than 20% in its seed round. What must it raise, and what is the lowest post-money it can accept?

The situation

Sproutvik Labs is building lab software that tracks samples and experiments for contract research labs. It has a working product in three pilot labs and a team of 30. Its monthly burn, salaries plus cloud and office costs net of the little revenue it earns, is Rs 1.5 crore.

The founders want 18 months of runway from this round, enough to reach the milestones a Series A investor will look for and leave time to raise. They add a 20% buffer for hiring delays and slips. They have also decided they will not sell more than 20% of the company in the seed round.

Your task

Work out the raise and the lowest post-money valuation that keeps dilution at or below 20%, and say what the founders should do if investors offer less.

Quick check

What is the lowest post-money valuation Sproutvik can accept?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Sproutvik must raise Rs 32.4 crore and cannot accept a post-money below Rs 162 crore. Eighteen months at Rs 1.5 crore is Rs 27 crore; a 20% buffer makes Rs 32.4 crore. At no more than 20% dilution, Rs 32.4 crore must be at most a fifth of the post-money, so the floor is Rs 162 crore, a pre-money of Rs 129.6 crore. If investors offer less, the founders must give up more equity, raise less or cut burn.

Step 1How much does Sproutvik need to raise?

Planning a long trip, you multiply the daily cost by the number of days and then add something for the things that always go wrong. A seed raise is the same sum: monthly burn times months of runway, plus a buffer. Rs 1.5 crore a month for 18 months is Rs 27 crore. A 20% buffer adds Rs 5.4 crore, so the raise is Rs 32.4 crore. The 18 months is not arbitrary: roughly a year to hit the milestones the next round will need, and about six months to raise it.

Step 2What is the lowest post-money it can accept?

Dilution is the new money divided by the post-money. If Rs 32.4 crore can be at most 20% of the post-money, the post-money must be at least Rs 32.4 crore divided by 0.20, Rs 162 crore, which is a pre-money of Rs 129.6 crore. A lower post-money means the same cheque buys more than 20%.

The relationship
Post-money≥1.5×18×1.200.20=32.40.20=162\text{Post-money} \geq \frac{1.5 \times 18 \times 1.20}{0.20} = \frac{32.4}{0.20} = 162
1.5 x 18burn times months, Rs 27 crore
1.20the 20% buffer
0.20the most the founders will sell
What it says in wordsThe valuation floor is the money the company needs divided by the largest share it will sell for it.
Burn and months set the raise; the dilution cap turns it into a valuation floor18 months x Rs 1.5 crore = Rs 27 crore+20%RaiseRs 32.4 crbuffer Rs 5.4 crPost-money at the 20% cap, Rs croreexisting holders keep 80%: Rs 129.6 crore pre-money20%: Rs 32.4 crLowest acceptable post-money: Rs 32.4 crore / 20% = Rs 162 croreBelow that, the round either costs more than 20% or raises less than 18 months of runway
Eighteen months of Rs 1.5 crore burn plus a 20% buffer makes a Rs 32.4 crore raise, and capping dilution at 20% turns that raise into a Rs 162 crore floor on the post-money.
Step 3What if investors will only pay Rs 100 crore post?

Then one of the three numbers has to give. Raising the full Rs 32.4 crore at Rs 100 crore post costs 32.4% of the company; raising only 20%, Rs 20 crore, buys about 11 months at today's burn with the same buffer. Or the founders cut burn: Rs 20 crore covers 18 months with the buffer only if monthly burn falls to about Rs 0.93 crore. Each choice has a cost. More dilution is permanent; a shorter runway risks raising again before the milestones are met, often at a worse price; a lower burn slows the product.

Option at Rs 100 crore postRaise, Rs croreDilutionRunway with buffer, months
Raise the full amount32.432.4%18
Sell only 20%20.020.0%11.1
Sell 20% and cut burn to Rs 0.93 crore20.020.0%18
At a Rs 100 crore post-money the founders must choose between 32.4% dilution, about 11 months of runway, or cutting monthly burn to about Rs 0.93 crore.
Step 4What would you advise the founders?

Test whether Rs 162 crore post is realistic for a seed-stage lab software company with three pilots before committing to the 20% rule. A 20% cap is a sensible guide, not a law; giving up 25% for a full 18 months is usually better than giving up 20% for 11 months and raising again in a hurry. The weakest number in the plan is the burn: if the team plans to hire after the round, burn will rise and 18 months will shrink. Model the raise on the burn the company will have after hiring, not the burn it has today.

Where candidates lose it

Candidates divide Rs 27 crore by 20% and say Rs 135 crore, forgetting the buffer the founders asked for. The raise is Rs 32.4 crore, and the floor is Rs 162 crore.

The second miss is quoting Rs 129.6 crore as the answer. That is the pre-money; the question asks for the post-money, and mixing the two is the most common slip in round arithmetic.

What the interviewer asks next

  • Burn will rise to Rs 2.2 crore a month after hiring in month four. Redo the raise.
  • An investor offers Rs 25 crore at Rs 125 crore post plus a Rs 10 crore venture debt line. Compare it with the plan.
  • Why do founders usually budget 18 to 24 months of runway rather than 12?
  • How would an option pool top-up required by the investor change the effective dilution?

Company names and figures are illustrative.