Every successful business owner will agree that starting is the difficult part. Even with the best idea and team backing you up, it may seem like the odds are stacked against you. For most startups, the primary challenge is capital. Without funds, that brilliant idea remains just that – an idea. But, if you’re smart, and ready to give it your all to raise seed funds, there’s no reason why you shouldn’t get your business up and running.
While the goal is to raise as much money as possible during seed rounds, in this stage of fundraising, you can only walk away enough runway that will be enough for the next 12 to 18 months. The investors will give you $500,000 to $2 million for initial market research and product development.
However, how much you walk away with will depend on how prepared and convincing you are. To ensure you have your best foot forward as you approach the investors, we’ve provided a detailed guide on how seed rounds work. Find out what to expect and how to ensure your seed rounds are productive and most importantly, yield results.
How Much Can You Raise in a Seed Round?
If this is your first rodeo in fundraising, you’re probably aiming to raise as much money as possible so that you never have to go back to investors again. In an ideal world, that would be incredible. You’d get to grow your business to profitability without the need to raise funds every few months.
Unfortunately, that’s not how seed rounds work. In a seed round, the idea is to get enough runway for a 12 to 18-month period. A runway refers to the amount of time you have left until your business runs out of cash considering all your expenses and income remain constant. After this period, you’ll have to go back to investors to raise money in the Series A round.
So how much money should you expect to raise in a seed round? There are several things you should consider when trying to decide how much you need to raise. For starters, consider how many employees you need.
Silicon Valley startups consider the number of employees and multiply that with $15000 each month of a runway. For example, if you’re launching a new product, you may need about 3 employees to help with product development, marketing, and other daily operations. Multiply $15000 by 3 (number of employees) and 12 (runway period) to get an estimate of how much you need. In this case, $15000 x 3 x 12 = $540,000.
Play around with the numbers to see how much you’d need to survive 12 to 18 months without running out of cash. You should also consider other expenditures in the business and compare then to your income to see how much you need per month. Afterward, multiply that with 12 or 18 months depending on how much runway you need to determine how much you need to raise in seed rounds.
You can also estimate how much you’ll get by considering “comparables”. This means comparing what other startups in the industry are raising. If everyone is getting between $500,000 and $1 million, you’ll have to have a good reason why you need $2 million.
That said, realistically, you can only get $500,000 to $2 million in seed rounds. If you do your calculations and you need less, you’d be better off getting funds from angel investors. And if you have a higher figure than $2 million, a Series A round would be the best choice for you.
Source: Investor Intelligence
How Much Equity is in a Seed Round?
The good news about seed rounds is that you won’t have to give equity in exchange for funds. In most cases, investors finance your business with convertible debt. This means that their investment has the potential to convert to an equity stake in your business at a later date.
Therefore, you shouldn’t think too much about how much you’re willing to sell at this stage. Your primary goal should be to use the funds you get to grow your business into profitability within the runway period.
This way, you’ll have enough room for negotiations and an opportunity for excellent investment deals in the Series A rounds where you raise money for equity. Also, keep in mind that the amount you raise during the seed rounds will affect your valuation when you pitch to investors in Series A rounds. Therefore, take the time to go through your numbers and consider their long-term effects.
11 Ways to Make Your Seed Rounds Productive and Successful
While there are a plethora of investors looking for promising startups to invest in, the fundraising process isn’t for the faint of heart. If you’re planning to enter a seed round to raise money for your startup, be prepared for ego-deflating, long, and complex processes.
There will be days when you think you’re almost landing the deal of a lifetime only for the investor to pull out at the last minute. For beginners, finding the right investor may also prove challenging than you think. But don’t fret. We’ve complied 11 effective tips to help you make the most out of your seed rounds and land the best investor. Let’s dive right in.
You’ve probably heard stories about startups that raised funds for their business overnight by simply starting a Crowd Funding page. That’s the exception, not the rule. In the real business world, it takes a long time to raise fund in the seed rounds.
And if you’re a beginner with barely any network, it may take even longer since you’ll have to approach multiple people before getting a positive response. Therefore, if you’re planning to start fundraising, it’s crucial to plan for the long haul.
If you have a partner, it may be best if one of you takes up the responsibility of running the business while the other runs the day to day activities of the business. This way, you’re less likely to burn out and your business will run smoothly. It also helps to build a fund raising strategy so that you know what needs to be done and when.
Create a “Perfect” Runway
Another way to ensure a smooth fundraising process is maintaining proper runway management. As we mentioned, your runway is the amount of time you have before your business runs out of money. You need to have enough breathing space when you’re approaching potential investors. If you don’t, a lot of things may go wrong.
One disadvantage of having a shorter runway that you need is that it backs you and your founders in a corner. You’ll be forced to do the impossible to stretch your funds further until you get another investment. It’s also possible for the investor to take advantage of your “tough” times. They may prolong the process if they know you’re running out of money so that they can negotiate better deals.
Don’t let it get to that. Take your time to brainstorm, plan, and investigate different aspects of your business to determine how much you need for 12 to 18 months. It may also be a good idea to rely on other sources of funding like angel investors, crowd sourcing, and family and friends to improve your runway.
A common mistake among startups is not being aggressive when approaching investors. The deeper you cast you’re net, the more likely you are to catch multiple fish. The same applies to fundraising. If you want to raise a lot of money in the seed rounds, you need to go the extra mile.
Approach potential investors every chance you get. Go to events, get referrals, and make that call you’ve been procrastinating. Building a relationship with potential investors makes it easier for you to get a deal when you want to ask for funds.
However, keep in mind that venture capitalists (VCs) are a busy lot. Schedule appointments and follow the right protocol when you want to talk or get feedback about your service or product.
Hold You and Your Team to the Highest Ethical Standard
Reputation is everything in the business world. And when it comes to investments, you’ll realize that the business world is quite small. Everyone seems to know everyone and everything. Therefore, tread carefully. Avoid screwing people over and always ensure you and your team maintain the highest ethical standard.
Chances are you won’t get many opportunities to raise funds if you have a reputation for being arrogant, impatient, and rude to investors. It’s, therefore, best to find healthy ways to channel your frustrations because they will be there.
Also, ensure your team knows what’s expected of them in and out of the work place. What they do will rub off on your business image. Ensure everyone is sending the right message to potential investors.
Accept “No” and Move On
The last thing a budding entrepreneur wants to hear is “no”. Rejection hurts and when you’re starting out, you may interpret it as a rejection of your business. You may also start doubting your capabilities and the potential of your business to grow into something significant.
It happens. But you should not take it personally. If an investor says no, there’s a good reason. Try to find out why instead of wallowing in self pity. By gathering investor feedback, you’ll be in a better position to understand what needs improvement in your business.
You’ll also identify the holes in your pitches that make investors shy away and improve on them. With practice, you’ll be closer to that “yes” you’ve been waiting for.
Source: Y Combinator
Get Answers As Soon as Possible
An investor that strings you along is worse than the one who says no. When you get a “no”, you can move on and look for other investors, but it’s different with an investor who gives you false hope. Investors delay making a decision if they’re not sure investing is the right decision but don’t want to miss out on the opportunity.
Don’t fall victim of this. Be bold enough to ask the investor what their processes, relevance, and timing are. This way, you’ll know whether or not to continue or start looking for other investment opportunities that will pay off.
Remember, fundraising takes a long time. You need to ensure all your efforts are paying off and can’t afford to waste time on someone who’s just getting a piggyback ride.
Perfect Your Pitch
To better your chances of raising a lot of funds in the seed rounds, it’s also crucial to have an excellent pitch. Most startups focus on their products and sales and forget to mention what problem they’re solving and what makes their business unique. You also need to have your projections on point.
Therefore, take the time to brainstorm and create an impressive pitch. Furthermore, practice your peach in front of people who know nothing about your business. These people are more likely to help you identify gaps in your pitch because, if they know nothing about your business, they won’t understand your pitch.
Also, get pointers from successful business owners who have been where you are. Find out how they pitched and what investors look for when considering funding a business. All this information will help you approach your investors with a pitch that will get them pulling out their wallets.
When you’re trying to raise seed funds, it’s also crucial to stay organized. Create a list of all the investors you plan to approach, set deadlines, and track your progress. It’s also advisable to use organization tools like Trello and Asana to keep track of your progress and deals.
And don’t be afraid to delegate tasks to your partners. As we mentioned, fundraising can be overwhelming. Therefore, come up with a workable system and allocate duties to each partner. It may also help to have regular meetings to see how much progress you’ve made and figure out whether or not you need to tweak your approach.
But don’t just focus on the fundraising aspect. Your business operations should also be a priority. Everything should be running smoothly because investors will be evaluating your business as well.
Confidence can make or break your chances of raising funds. Investors want to invest in someone who’s confident, know what he/she is doing, and has a clear goal of where the business can go. They’ll also want you to back up your claims with numbers and reliable projections.
You can’t afford to be timid. Present your pitch in a confident manner and respond to any questions without looking afraid. And when it doesn’t go your way, maintain a thick skin. Nonetheless, ensure your confidence doesn’t come across as arrogance.
The goal is to hold your own even when the pressure is too much. You can practice this by getting people to listen to your pitch and quiz you after. However, you need to get individuals who will be brutally honest without sparing your feelings because the investors won’t.
Look for the Right Investors
To get the most out of your seed fundraising, it’s also a good idea to approach the right investors. For instance, if you’re in the tech industry, it makes more sense to approach a tech entrepreneur compared to someone in the beauty industry.
In addition to this, you need to find an investor who is appropriate for the stage of your business. Since you’re just getting started, you need an investor will a lot of experience in the startups and one that mostly invests in seed rounds and series A. This type of an investor is more likely to bring in the experience you need to get your business of the ground and on the right foot.Use Your Story to Hook the Investors
Everyone loves a good story and so do investors. They’ll want to know how you came up with the business idea and why you believe it’s the next big thing. Most investors will also want to know what makes your product different from what’s already available on the market and how it will change the world.
The good thing about stories is that no one can have the exact same story as yours. Therefore, understand what makes your business model stand out and identify all the unique selling points to present to your investors.
Raising money in seed rounds is no easy feat. Like most rounds of investment, you’ll need to have a strong pitch, compelling numbers, and a solid plan that investors will be confident enough to invest in. However, you shouldn’t expect to raise too much money in this round of fundraising.
Seed rounds raise $500,000 to $2 million after which you’ll proceed to raise more money in the Series A round which includes giving up an equity stake of your business. Nonetheless, this doesn’t mean getting seed funding is easy. You’ll still need to go above and beyond to get your investors interested and pulling out their wallets. So use the above tips and get the most out of your fundraising efforts.