Seed Fundraising Basics for Startups
Starting a business is no easy task. Startups require various resources, the most important one often being money. Startups aim to grow, and to do that, revenue is required for things such as equipment, hiring employees, advertising, and even an office space or brick-and-mortar shop.
The initial money raised by business owners is commonly referred to as seed capital or seed funds. This is a brief overview of the essential factors of seed fundraising for startup founders.
Why raise seed funds?
In this case, we are talking about a startup as a business meant to grow fast. To sustain this sort of business, you will need a larger amount of capital than what you can raise from just friends and family. This is because fast-growing startups will burn through funds while they grow, before reaching profitability. For these reasons, you will want to acquire seed funds. Luckily, there are lots of investors out there who are willing to invest in your company if they see the potential. However, it must be noted that fundraising is typically a long and difficult process. Knowing when to raise seed money can help smooth out the process.
When is the right time to raise funds?
To gain the interest of investors, founders will need to impress them. To do so, founders should have a somewhat established reputation and be able to tell their stories compellingly. Founders will need to persuade investors by showing them that there is a market opportunity for the product or service and a discerned target audience. On top of that, the product or service should be getting adopted at about a 10% rate per week for several weeks. Having data to back up claims can help gain interest from investors.
Having an executive summary to show and leave behind for investors is a must. This document should be about one page in length and include the company’s vision, product, team, location, contact information, market size, traction, revenue, and any previous fundraising.
Founders will also need to craft a pitch slide deck online and use it to persuade investors. Think of the pitch deck as a way to tell your startup’s story. The pitch deck should be easy to follow and left behind for investors to reference. Rather than using lengthy paragraphs of text, try to include understandable graphics, charts, and images. There are thousands of online templates to choose from, but the pitch deck should be personalized to your liking and represent the company well. Founders may use programs such as Google Slides, Canva, or PowerPoint to create the pitch deck. Overall, pitch decks vary in content but typically include the following elements:
- The company, logo, and tagline
- The team: introduce your team and their roles. You may include headshots and bios. Emphasize why your team has what it takes to succeed.
- The vision: why did you create this company and where do you see it going in the future?
- The problem: what problem does the company solve for consumers?
- The solution: how does the company you’ve created solve the problem and why is now the right time? Do you have a unique insight and if so, what is it?
- The customer: who is the target audience? You may also include how you plan to reach them.
- The market: include the competition, macro trends, and SWOT analysis.
- Traction: list key statistics about your company’s current traction. Include plans for future customer acquisition and scaling.
- Business model: how will consumers translate to revenue? Include plans and goals.
- Fundraising: address funds you have already raised and what you plan to raise right now. You may also include financial projections and a summary product roadmap to demonstrate what an investment buys.
- Summary: 3-5 key takeaways
Once you have checked off the above items, it’s time to raise some seed capital.
How much?
Founders should try to raise as much money as they think they’ll need to reach profitability. This should put you in a comfortable position, not having to worry about fundraising in the future. To figure out how much money you’ll need to raise, start by creating a plan. In the end, you will want to have multiple hypothetical plans to fit different scenarios. Most first rounds result in around $600,000 of raised capital and can go up to about $2 million.
Types of Financing Options
Convertible Debt
Convertible debt involves a company borrowing money from an investor. In this type of agreement, the company agrees to repay the entire loan by converting it to a number of shares of common stock in the issuing company. The loan will include a principal amount, interest rate, and maturity date. The convertible note converts to equity when the company does equity financing. The interest rate in convertible bonds usually ranges from two to eight percent.
SAFE
SAFE is an acronym for simple agreement for future equity. A SAFE is a simpler and more flexible version of convertible debt. The biggest difference between a SAFE and convertible debt is that a SAFE is not debt, thus it lacks the interest rate, maturity, and repayment requirement. With a SAFE, an investor will get stock later in exchange for the cash investment now.
Equity
Equity rounds are quite uncommon for seed fundraising because they tend to be more expensive, complicated, and time-consuming than convertible debt or safes. An equity round involves setting a valuation for your company, resulting in a per-share price. With equity-based financing, founders will issue and sell new shares of the company to investors. When planning to issue equity, you will want to hire a lawyer.
Investors (Venture Capitalists & Angels)
Angels and venture capitalists are similar but have one key difference. Angel investors are amateurs and are investing their own money. Venture capitalists are professionals who invest other people’s money. Angels typically act faster, while venture capitalists tend to require more time, meetings, and partners involved. Venture capitalists are experienced and see lots of deals, so you will have to stand out from the crowd when pitching to them. A great way to meet investors is to attend a demo day. Demo days are events that involve investors meeting and conversing with startup founders. Founders may also consider reaching out to someone in their network to connect them with an angel investor or venture capitalist.
Crowdfunding
Crowdfunding involves raising money from a large number of investors and is usually done through the internet today. Crowdfunding sites can be used to find venture funding or launch a product. A couple of crowdfunding sites include Kickstarter and Wefunder.
General Rules
- Be upfront and honest with investors
- Be friendly
- Don’t be arrogant, aggressive, or defensive
- Find the balance between humility and confidence
- Be quick to follow up and close a deal
- Stick with what you agreed to
- Don’t be a sore loser. You need to be thick-skinned when you get turned down. Thank investors for their time and part ways. You don’t want to cause a scene and consequently have a bad reputation
- Stay organized. You can use software to keep track of things
- Don’t ask for an NDA
- Remember that investors normally don’t close on the day of the pitch. The goal should be to get another meeting, not to close the day of
- Meet as many investors as possible but focus on the ones who seem the most likely to commit
- If your company is product-based, bring the product to the pitch and give a demo
- Listen to what the investors have to say
- Do your research and try to create a connection with investors
- Come prepared. Practice your pitch, make sure you are comfortable with the technology, arrive early, and bring leave-behinds
- Close the meeting with clear next steps
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