How To Raise Your Startup Seed Round

You’ve identified the business opportunity you want to capture and need to raise additional capital to truly begin building your business. Entrepreneurs in this position may already be operating their business and others may not. It depends on the market opportunity and barriers to entry (or lack thereof). Either way, entrepreneurs need to start making a list of potential financing sources and begin the first round of fundraising.

A spreadsheet is probably the best place to start your list. You’ll have different stages for your investor candidates, typically including (in order of awesomeness):

In (Money in the bank. Yay!!)
Signed (Subscription agreement executed)
Term Sheet Sent
Meeting Confirmed (You could have multiple stages of meetings, up to you)
Waiting on Initial Meeting
Intro Email Sent
In Limbo (Targets, but haven’t gotten an intro yet)
Making a Referral (Targets who may not be interested and can refer others/make intros)
Not Interested (Keep a list of the people who weren’t interested. Either, you can message them in the future for the next round or you can gloat once you’re acquired)

It’s important to keep track of basics like what company each person works at, their title, how you know them, and additional notes or tips for yourself. Remember, fundraising is like dating. It’s a numbers game.

Couple pointers before we get started:

Don’t ask for NDA’s. It’s an immediate turn-off to any sophisticated investor.
Don’t feel guilty scouring your network for investors. If you are truly confident in your business, you won’t think of it as a negative going to friends for help. Rather, a positive that you are bringing them such a great opportunity to make money on.
When deciding how to structure your investment, read this article when deciding on debt vs. equity.

Friends & Family

The key to raising from individual investors (including Angels) is to find your lead investor. The lead investor should take up at least 20% of the round you are raising. If they have experience angel investing, then that’s even better. But, it’s not a prerequisite. Most likely, they will be someone close to you because they are investing in you. They know you, believe in you and are confident that you will be successful even though there’s a 100% chance your idea will twist and turn as you grow.

The faster you get a lead investor, the better. You have a much higher chance of closing an investor when the terms of the investment are set versus variable. It’s easier for an investor to make a yes or no decision rather than working with you to figure out the correct valuation (in an equity raise scenario) or valuation cap (in a convertible note scenario), for example.

Angels

Angel groups are different than angel investors. Angel groups are organizations that have a structure and process for investing in startups. You can find many lists of the top or most active angel groups by doing Google searches. Here’s one said list. You can use the groups as a way to find individual angels who will sometimes invest outside of the group. Or, some will say they only invest through the group (especially if they don’t like your idea!).

Don’t be worried about your lead investor’s terms scaring off future angels. If the angel wants to invest in your business, they’ll let you know. And, if the valuation or terms of the lead investor are really such a deal-breaker for them, you can always offer them warrants or additional compensation to “sweeten the deal.” That said, it’s harder to get an angel group to invest in your business if you already have a high valuation or stricter investment terms.

Venture Seed Investors

There are now venture capital firms solely focused on seed stage investments. Quite a lot of them actually, see here. The presence of any existing investors will most likely scare off any venture seed stage firms. They like to be the “first money in.” They also are very comfortable to do convertible notes which, in my personal opinion, are much more advantageous for the founders.

Some firms will want to participate in your Series A. Some will only do seed stage investing. This is a double edge sword. On one side, if your startup does well and crushes its targets, you already have your lead investor lined up for your Series A. On the other hand, if the firm does not invest in your Series A, it’s a bad signal to the rest of the market. Remember, the world of venture capital is very small.

Accelerators

If none of these options work for you, go join an accelerator :) Ycombinator by-far has the best reputation. To put it in perspective, a $2-3 million cap on your valuation in your convertible note is an OK cap, especially if you’re raising less than $500,000 in your seed round. Many portfolio companies coming out of YC will see caps around $10 million, sometimes higher.

Filed under: Platform Innovation | Topics: Funding, seed stage, startups, Venture Capital