Welcome back to Part II of our guide on how to raise a seed round or pre-seed round! So glad to have you.
In Part I: Background, we gave an overview of raising capital. In this Goji Blog, we’ll actually provide some concrete steps—compiled from experts on the matter—on how to raise seed money.
How to Raise a Seed Round
Seed Fundraising: Aim for the right investors
As we discussed in Part I, there are different types of investors, the most common being VCs, Angels, Micro-VC/Super-Angels, Incubators/Accelerators, and Crowdfunders.
Often, these investors will specialize in either multi-stage or seed-stage investments. Multi-stage firms invest at every pre-IPO stage, whereas seed-stage firms and angels (often Micro-VCs/Super Angels) specialize in seed funding.
Investors are also segmented by industry, of course, and the type of products (software vs. hardware, etc.) In general, however, your seed goal is to generate enough traction to get a Series A investment from a well-regarded investor (Step #6.)
Founder Brent Franson suggests organizing your prospective investors by investor philosophy, “intro path,” referrals and recommendations, typical investment rounds, lead investor vs. follow, order of preference in pitching and timing, and the likelihood of obtaining investment.
A Strategic Pitch Schedule
Use your previous sequencing of prospective investments to order them from most to least desired. And then, try to schedule your #15 – #30 in your first week of pitches and #1 – #15 in your second week. You’ll be grateful to get feedback and practice before pitching to your top choices.
Furthermore, the number of contact touchpoints has increased but yields the same number of meetings—ergo, competition is higher.
Seed Fundraising: Be Prepared, and Keep Preparing
To be as prepared as possible, there are several factors to consider.
You’ll need to have:
- Enthusiastic and understanding references
- Hard numbers and solid, thought out projections
- Business plan backed by thorough market validation and SWOT analysis
- Specified “ask”: a specific, budgeting- and cost-projection-based answer to the question, “How much are you looking to raise?”
- Protection, aka, a strong understanding of how VCs make their decisions, what’s in it for them, what’s in it for you, and how much you’re willing to negotiate
- An idea of your desired investment range (larger vs. smaller — depending on your leverage and understanding of tradeoffs)
Seed Fundraising: Your Deck
Your executive summary and deck are your chance to explain your business case through a story—an essential leave-behind to which investors can refer and share. They should comprise a narrative that sums up the crucial elements of your company.
These elements include the problem you’re addressing and the solution you’re proposing; why your team is especially qualified to solve it; market timing and size; and your plans to succeed, return the investment, and scale.
And—here’s the kicker. You need to explain all of this in “2 minutes to 3m27s.” The latter is the average amount of time a VC will look at a deck.
So. Your deck has to be thorough yet easy to read and quick, yet not rushed. That means graphics, charts, and screenshots are your best friends here.
Renowned incubator, YCombinator, recommends including the following elements:
- Company name, logo, and tag line
- Vision (raison d’etre)
- The Problem
- Your Customer
- Your Solution
- Gigantic Market — backed by solid evidence (*bonus points if TAM <$1B*)
- Market Landscape — competitive analysis, macro trends, unique insights, etc.
- Current Traction Stats + Scaling/Customer Acquisition Plans
- Business Model (“actuals, plans, hopes”)
- Team — backgrounds, roles, and your unique edge (“pics and bios okay”)
- Summary — 3-5 key takeaways (“market size, key product insight, traction”)
- Fundraising — what you’ve raised before and what you plan on raising now
- Financial projections, budgeting, and contingent product roadmap
Seed Fundraising: The Pitch
Your pitch should be impeccably rehearsed and practice—but that doesn’t mean you won’t get valuable implicit and explicit feedback throughout the process. And by the way—the best meetings won’t rely on the deck; they’ll be a conversation rather than a presentation.
In any case, though, take note of feedback trends, and hone your narrative and deck accordingly. For example, if you’re meeting over Zoom, Franson suggests prioritizing your face-to-face time rather than presentation. So, you might organize your presentation like this:
- Face-to-Face: Introductions (10 minutes)
- Slides: Deck Review (15 minutes)
- Face-to-Face: Debrief, conversion, questions (remainder of the time)
Franson also notes: if there’s no immediate follow-up, the answer is very likely “no.”
Seed Fundraising: Gain Some Traction
One of your main leverage points is traction—which can be hard proof of demand and interest in your product. And this applies both to customers and investors.
With customers, growing interest and substantial numbers will encourage investors that there is room to scale, monetize, and return their investments. For instance, 10% user growth per week for several weeks, for example.
Gaining user traction comes from building an excellent, scalable, and sustainable MVP with the right development partner.
But among investors, traction is a bit different. In a very standard psych fashion, when one person conveys interest in something, it affirms to the other that their own interest is sound. And investors are not immune to that logic.
So, when one investor signals that a term sheet is coming, you can leverage their verbal cues to speed up other conversations. This doesn’t mean shopping around terms, but rather expediting any coals you already have in the fire.
Honesty is essential in this delicate process. Once you have a term sheet or verbal terms in hand, let your investor know you’ll be finishing up the conversations you’re currently in but that you won’t begin and new ones—and stick with that. Your reputation is everything.
Seed Fundraising: Network
According to Investopedia, “Networking is the most essential tool and skill that an entrepreneur needs, ahead of business acumen.” So, flex those social muscles of yours.
- Angel investors like talking to new, enthusiastic entrepreneurs on social media.
- Smaller VCs are big on supporting local startup communities.
- Join accelerators and incubators, and find demo days at which to present.
- Take advantage of whatever warm introductions you can get, keeping in mind that smaller angel investors share interesting companies with their networks.
Seed Fundraising: Find a Lead Investor
Your lead investor is the one who takes on the liability for due diligence, setting terms for future rounds, and an inherently larger risk given their larger investment. So, it’s important to get one early on and add other investors later on.
Lead investors must be positively stoked about your long-term growth potential and be aligned with your vision. Ideally, they’ll have a good brand (helps attract talent); a good network (helps with introductions to customers, candidates, and partners); and experience (i.e., informed and fantastic mentorship)
Seed Fundraising: Get Comfortable with Rejection
In his article, Franson says:
“…even the absolute best early-stage venture investors have spent a huge portion of their careers on the frontlines of failure…most of the investments they make fail, and they’re constantly working with founders to avert those failures if at all possible.”
Take note of this—because things likely won’t go right the first time or the second. It’ll be so important to maintain your confidence and entrepreneurial spirit (while not letting in idealistic naivete.)
So remember—in the entrepreneurial realm, almost everyone has had their fair share of brushes with failure, mistakes, and falling short. That’s what makes this whole thing high-risk, high-reward.
Stay transparent, build projections with “best-worst case scenarios,” and as a new venture, give your prospective investors a reason to believe in you.
How to Raise a Seed Round: Do’s and Don’ts
YCombinator put out an excellent list of “Do’s and Dont’s” in fundraising—here are some of them.
| – Balance confidence and humility|
– Develop a thick skin
– Be “greedy” — prioritize investors by expected value of investment
– Sign docs as soon as there’s a “yes”
– Part on the best possible terms, even if it’s a “no” (this time around)
– Stay organized and delegated
– Be honest with what you do know and what you don’t
| – Be dishonest, arrogant, or overly aggressive (i.e., breaking a verbal or |
– Seem indecisive
– Get lazy – even if you’re trending, pursue leads as if you weren’t
– Talk too much – it’s a conversation, not a monologue
– Lack persuasive and accurate evidence to back up your numbers
– Ask for an NDA
Well, this was a lot. We know. So, it could be beneficial to consult product strategy experts who’ll help you put the theory to the rubber.
Coincidentally, hi, we’re Goji Labs—a product and software development consultancy with experience in designing, “rescuing,” and deploying hundreds of products.
Looking to develop a new app or revamp an existing one?
Reach us at GojiLabs.com.
– Goji Labs