The Tug-of-War Between Fundraising and Valuation in the Angel Round

In the years preceding the recent surge in capital bubbles, sky-high financing rounds repeatedly shattered our expectations. Altos Labs, which boasts a roster packed with Nobel laureates, secured a staggering $3 billion in angel funding, setting a new record for fundraising in the life sciences sector.

We have begun to harbor a misconception—that only through substantial financing and sky-high valuations can a company’s value and significance be demonstrated. Yet now, as the tide recedes and the market tightens,“Securing large-scale financing early on = success”Does the theory still hold?

“From 2019 to 2020, seed, Series A, and Series B financing rounds progressed rapidly; the current situation was rarely seen,” said Wang Haijiao, Deputy General Manager of GTJA Investment Group. The increasing number of early-stage financing rounds indicates that securing early-stage funding has become more difficult.

Angel and seed rounds represent the earliest startup capital for entrepreneurs. Compared to later stages, the investor profile in this round is highly diverse, ranging from professional venture capital firms to friends, family, and industry corporations. Consequently, fundraising during the angel/seed stage often appears less structured; non-professional investors may lack deep industry insights, treating valuation negotiations more like general business deals.

“Under the current fundraising environment, it is terrible for such a situation to arise,” an investor told VCBeat. The investment firm he works for is backed by a well-known incubator and has handled angel rounds for numerous startups.From his experience, insufficient angel-round financing still occurs from time to time, particularly among clinician or professor founders.

“The current financing environment” as a temporal qualifier caught the attention of VCBeat. An investor explained:“The market is generally tightening now; it’s not comparable to before.”

While starting a business has never been easy, the current challenges are significantly greater, partly reflected in the increasing difficulty of securing financing. A few years ago, when a promising technology or innovative idea emerged, investors were willing to commit substantial capital, accepting high risks in pursuit of high returns. Financing was generally more accessible; if a funding round fell short, companies could quickly launch another round and still find investors ready to participate. Some investment firms even leveraged their post-investment services to help bridge any funding gaps for their portfolio companies.

However, the current financial market is tight. Investors are participating in far fewer angel rounds and committing significantly less capital than before, while also substantially extending their due diligence periods. This means that once a startup issues an early warning of cash flow shortages, even if it immediately initiates fundraising and everything proceeds smoothly, it may still take six months to a year for the funds to be received. During this period of “cash crunch,” various crises may arise, such as delays in product development, loss of key talent, and being overtaken by competitors. For angel-stage companies with unstable foundations, some of these setbacks can even be fatal.

Of course, some startups have secured sufficient funding, but a portion of them have paid a higher price—Exchange for more shares.However, the risks of diluting too much equity in the early stages are self-evident. As the company gradually develops, the funding amounts raised in later Series A and Series B rounds will only continue to increase.

Fortunately, there are not many companies in this situation.

In the current climate of cooling investment, valuation has always been a double-edged sword. Excessively low valuations fail to support companies in securing sufficient financing, while excessively high valuations may create bottlenecks for subsequent funding rounds. A Ph.D. in pharmacy working at an investment firm believes that mathematics could help founders address this challenge.

First, a golden rule must be established for the equity dilution ratio. He diluted external shares during the angel round.Preferably not exceeding 30%, which is more conducive to later-stage financing. Meanwhile, as the enterprise reaches its mid-to-late stages of development, it is less likely to encounter an "equity crisis."

Next is calculation,"Investment Amount ÷ (Pre-money Valuation + Investment Amount) = Equity Stake Acquired by the Investor", taking a company with a pre-money valuation of RMB 80 million as an example, if an investor invests RMB 20 million in the angel round, they will acquire a 20% equity stake in the company.

Finally, the rhythm.Each round of financing is akin to ascending a step, with certain established conventions and standards.: The purpose of the angel round is to get the business up and running; business expansion and product upgrades should be reserved for Series A and Series B financing rounds.

Even after securing a substantial angel round in one go, the funds cannot be used at will. If the angel-round capital is not fully utilized, the company cannot proceed to the next financing round, which creates significant complications.

Returning to the formula, we can see that the most decisive variable is actually the enterprise'sValuation.

Regarding valuation, we have discussed it multiple times, and the ultimate answer is—Valuation Is an “Enigmatic” Entity. It reflects the CEO’s fundamental understanding of the enterprise and their grasp of the market, while also encompassing the investment community’s forecasts and assessments of the company’s future.

Following the Series A round and subsequent financings, companies can calculate an accurate valuation by comprehensively assessing factors such as net growth in recent years, product innovation, team capabilities, and debt status, thereby determining a reasonable fundraising range. Additionally, the amounts raised in earlier rounds also influence later-stage valuations. Many companies or venture capital (VC) firms engage in intense negotiations over valuation before initiating fundraising or finalizing investments: for a given investment amount, a higher valuation means VCs receive fewer equity shares, and vice versa.

Therefore, prior to engaging in financing and investment activities, many companies engage professional financial advisory (FA) teams to conduct valuation assessments, with greater caution exercised in valuation judgments at later stages.

However, companies at the angel round stage are different. These companies generally lack stable cash flow and still need to refine their products and teams. Unlike mature enterprises, they struggle to derive an accurate valuation through fixed valuation models.

Therefore,Valuation of companies at the angel round stage often adopts"Relative Valuation", which is roughly on par with peers in the same sector. If a product demonstrates higher innovation and forward-looking potential, its valuation may exceed the average. However, at this stage, most companies’ products are still in the conceptual or prototype phase, making it difficult to boost valuation through product merits alone.“Valuation Based on the Founder”have become the keywords of this stage.

First, let’s look at researchers.If a company’s R&D team is backed by industry luminaries, or if it stems from the commercialization of a professor’s research achievements, it generally commands a higher valuation. Hard technology has remained a hot topic in the investment community in recent years. Although some argue that “professors don’t understand entrepreneurship,” investors who prioritize technical expertise believe that superior technology speaks for itself, while other resources can be supplemented as needed.

Next, consider the fund manager.If the management team is highly experienced, particularly when executives from well-known companies launch their own ventures, corporate valuations tend to be high. An experienced management team signifies that its members remain at the forefront of the industry, possess acute market sensitivity, and can devise profitable business models aligned with the company’s growth trajectory. Furthermore, they often bring substantial downstream industrial resources that can facilitate the early-stage development of startups. Consequently, a common saying in the investment community is that “executives launching startups come with an inherent halo.”

Returning to angel-round investment itself, it is often an investment based on trust in the “people” involved.Valuation is the first step in an angel financing round. When everything else remains speculative, the “people” factor becomes the only certainty and thus a key determinant of valuation.

Whether it is “integration” or “valuation,” for companies at the angel round stage, it is a competition—competing with peers in the same sector as well as with their past selves. If valuation is determined by the market, then the determination of fundraising amounts must be controlled by the CEO themselves. At the end of the interview, several investors also offered their advice:

In the early stages of a startup, young CEOs are easily misled by their limited perspective, believing that their chosen track and research focus are inherently the most valuable. In reality, market acceptance is the ultimate arbiter. During fundraising, it is essential to have a thorough understanding of one’s own company, conduct extensive industry comparisons, and identify appropriate benchmarks to arrive at valuation figures that align with actual needs.

In an era that prizes original innovation, entrepreneurship among researchers is gaining momentum. However, significant barriers still separate the scientific community from the market, making it essential for professionals with investment and financing expertise to provide strategic oversight. By engaging financial advisors early in the valuation and fundraising processes, researchers can navigate the early stages of their entrepreneurial journeys with greater stability.

The financing structure must align with the company’s development plan. Each successful funding round not only signifies investors’ affirmation of the company’s current progress but also represents a bet on its future growth. Whether the company has achieved tangible results since its previous funding round is a key criterion for investor evaluation. Therefore, corporate development plans should be broken down into quarterly milestones, serving as both internal targets and reference points for investors.

When announcing the fundraising amount, in addition to considering the pre-money valuation, it is necessary to rationally estimate the specific amount of each expenditure. Strive for maximum precision to avoid a funding shortfall. Furthermore, accurate cash runway calculations are essential. Since startups at the angel round stage rarely generate significant revenue, CEOs should strive to prevent periods where expenditures exceed income, thereby mitigating entrepreneurial risk.

Additionally, during a period of general market contraction, it is advisable for CEOs to secure ample financial reserves whenever financing opportunities arise, thereby ensuring sufficient buffer to navigate future volatility.

When encountering investors who are a good “fit” and can provide strong post-investment services, CEOs should consider maintaining positive relationships with them. Investors who contribute more often expect companies to deliver higher-quality returns. Therefore, financing terms should be structured with appropriate emphasis on these considerations.

In recent years, the time elapsed from expressing financing intent to securing funds has grown increasingly longer. Until the deal is finally closed, uncertainties remain; in some cases, collaborations are even abruptly terminated. This phenomenon is driven not only by heightened investor caution but also by intensifying market competition.

Amid changing times, entrepreneurs need to steer clear of impetuousness and possess the patience to wait. In the face of technological innovation challenges, everyone is gritting their teeth and persevering, awaiting the day they break through.