Are you wondering how to raise a seed round?
Seed round investment is the critical funding round for many startups. Without it, the foundation of a business cannot be created, making it more difficult to raise capital during subsequent investment rounds. The key question then is: How do you raise funds during a seed round?
The Ultimate Guide To Pitch Decks
What is a Seed Round?
A seed round is simply the earliest funding round a startup entrepreneur enters. It is the first step to securing the funds in order for your business to operate. The term is used interchangeably with “angel investor round”.
The goal of a seed round financing is to raise enough capital in order to create the infrastructure necessary to reach more substantial fundraising rounds later (often referred to as Series A, B, C, etc.).
Traditionally, seed round investment was under the $500K threshold and used for foundational business practices like creating a business plan. However, it can also be used to develop a product prototype, create product design, gather market research data, or hire infrastructures like office space and server networks.
As pointed out by entrepreneur and now VC investor, Mark Suster, this changed throughout the early 2000s as it became 90% cheaper to create a new company due to advances in technology.
The number of startup founders exploded and so too did the number of angel investors – the end result drove the investment price up, and now seed rounds regularly look for millions of dollars of the initial investment. If you are in the US located on the East Coast, for example, you will be seeing rounds that raise up to $2M in one go.
An unintended consequence was that Series A funding decreased because people were front-loading their investment during the seed round.
Today, seed rounds now sit in this strange twilight zone where they often raise more than just the initial amount necessary for angel investors to help budding entrepreneurs on their way. These excess funds are then put towards some of the more advanced business development costs traditionally associated with Series A funding.
The takeaway: After raising seed money, don’t plan for larger investment amounts to necessarily be given during Series A rounds if your seed round fundraising is substantial.
As a good summary of how financing rounds you will be able to find the slide below.
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What Are The Investor Expectations
When wondering how to raise a seed round, more than simply understanding the terminology and what each round entails, you‘ll also need to know which rounds are specific to your situation, and how to navigate each one effectively. At a seed round, investors will typically expect the following ingredients to be in place:
- Concept development
- Market research viability
- Pitch development
- The vision and mission are defined
- Market and demographics are researched
- There is a founding team in place with clear roles
Why the Seed Round is so Important
Without adequate seed round investment from angel investors, most startup founders have to use their own savings. In fact, 77% of all small businesses require personal investment from business owners during initial funding.
However, depending on the startup business niche, using your own funds may be a drop in the water in comparison to what is actually required to get a business on its feet. Manufacturing and marketing costs are prohibitive, and that’s without factoring in product or service development costs.
You may also not have access to any kind of credit line or personal savings resource so that, even if the required investment is modest, you still need angel investors to get the ball rolling.
Acquiring the right amount of funding is essential. 50% of small businesses do not survive the first five years, with a lack of working capital being a primary reason for this one-out-of-two failure.
In essence, then, seed rounds are what help founders give birth to their vision, creating the foundations of a business of which subsequent investors will wish to be a part.
There are several ways to increase your chances of attracting the seed investment your startup needs. Let’s look at some of the most important ones:
More than One Founder
When it comes down to how to raise a seed round, keep in mind that startups with one founder do succeed, so if you’re on your own, don’t let that put you off from chasing your business goals.
However, an analysis of 549 successful companies, shows that startups with two founders are 30% more likely to succeed. This is well known in investor circles, so investors are more likely to invest if there are two founders involved.
The reason for this is that two people bring different skills and perspectives to the running of a startup. This increases innovation and creativity, while also sharing the stress of creating a successful company.
It should be noted that companies with more than three founders are often seen as “having too many cooks” which can be counterproductive when creating vision. I often think of the old maxim: “A camel is a horse designed by committee”. Visions are easily lost when too many people are trying to bring their views to the table.
If you want to go into more detail below is a video where I go in deeper on how to raise a seed round.
Two founders are always preferential, especially during seed rounds, before others come on board.
Angel investors are usually more interested in being part of an entrepreneur’s development than making a quick buck. Sure, they want to profit like anyone, but it’s important to remember that most angel investors are high-income individuals willing to help startup founders with their excess income.
As Richard Harroch, when writing for Forbes, put it: “Angels particularly care about the quality, passion, commitment, and integrity of the founders.”
Weight your talent alongside the market opportunity and angels will have confidence that you are a good bet.
Make Sure You Know the Right Terms
As you are thinking about how to raise a seed round, the structure is critical. There are a number of financial terms that you will need to know in order to negotiate with angel investors. Not knowing them shows you are underprepared. Some of these terms include:
- Convertible Note: Many angel investors will accept a convertible note deal. This means that the investor has a legally binding note that, in return for a loan or investment, will be traded for shares in the company at a later date.
- Cap: Also referred to as “valuation cap”. This is the maximum price or amount of equity a convertible note can reach.
- Pre-Money Valuation: This is the valuation of a company before any investment has been made or financing secured.
- Post-Money valuation: The value of a company during or after investment.
- SAFE: This means, Simple Agreement for Future Equity. Similar to a convertible note, this form of seed investment is popular now. SAFE notes are a contract that states how much equity an investor should receive during subsequent financing rounds.
Below you will be able to find a few recommendations in order to increase the chances of getting funded.
Target The Right Investors
When thinking about how to raise a seed round, time is of the essence. You need to target the folks that have the right type of investment thesis where your opportunity may be a fit. What that been said, below are the 10 most active angel investors at a seed financing level:
- Fabrice Grinda
- Paul Buchheit
- Wei Guo
- Naval Ravikant
- Mark Cuban
- Daniel Curran
- Scott Banister
- Marc Benioff
- Louis Beryl
- Simon Murdoch
In many instances, if you are not a celebrity investor and perhaps the profile of a senior executive at a large corporation you would tend to see those individuals being part of angel groups to gain access to deal flow. The 10 best angel groups are the following:
- Tech Coast Angels
- VA Angels
- Houston Angel Network
- Alliance of Angels
- Sand Hill Angels
- New York Angels
- Zillionize Angel
- Keiretsu Forum
- Dingman Center For Entrepreneurship
- Maine Angels
Lastly, when it comes down to how to raise a seed round, you could also consider VCs. However, you need to be careful so that if you onboard a VC also known for investing in your next round (Series A) that VC continues to invest in your next financing. If they don’t re-invest, then people will think there is something wrong with your company and it basically sends a massive negative signal to the market. With that been said, the top VCs at a Seed stage are the following:
- 500 startups
- Index Ventures
- First Round Capital
- General Catalyst
- Battery Ventures
- Matrix Partners
- Polaris Partners
- Founders Fund
Below are some good recommendations on how to build momentum with investors.
Remember that storytelling plays a key role in fundraising and you will need capital to scale things up. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
FULL TRANSCRIPTION OF THE VIDEO:
Hello, everyone. This is Alejandro Cremades, and today we’re going to be talking about How to Raise a Seed Round. Basically, what we’re going to be discussing is what is a seed round? What are the different expectations, and some of the different things that founders are going to need in place in order to get that money early-on? So, with that being said, let’s get into it.
The first part is to understand what a seed round is. A seed round of financing is ultimately that first trench of money that the founder or the company is bringing in from early-stage investors and it ends up being the first round of financing that you raise as a founder.
The goal of the seed round is to raise enough money so that you can build the infrastructure and the key initial pillars of the business in order to scale up. Typically, the amounts of money that you’re going to be raising depends on your location. For example, on the East Coast or on the West Coast of the U.S., I’m seeing seed rounds that go all the way up to 2 million. But, obviously, if you’re outside of the U.S. and out of those startup hubs, probably you’re going to look at less money. Again, it ranges from as little as 100,000 all the way up to 2 million, as I was saying.
The next part of understanding how to raise a seed round of financing is to get what are going to be the expectations that the investor is going to have when you go out there and when you try to raise this money. Essentially, those expectations are going to be that you have already an 18-to-24-month roadmap, that you have a founding team in place, that you have an idea on how you’re going to be building and scaling your platform, and then also that you figured out how you’re going to get to your customers and who your customers are.
The next thing to understand is why a seed round is so important. Just like other really great experts, like super-successful founders like, for example, Reid Hoffman, who built LinkedIn and now is a venture capitalist, they always say that the way that you raise money today is going to impact the way that you can raise money tomorrow.
So, for that reason, you want to make sure that this very first round that you’re raising, you get the right people for the right reasons, they’re aligned with your vision and your mission, and they’re going to be there sharing the journey with you on the long run. The last thing that you want is to bring the wrong people for the wrong reasons, and essentially, those could be catastrophic, and it’s going to be super hard to divorce your investor.
So, know that once you get that investor in, and they’re part of your cap table, which is recording who owns what of the business in terms of equity, you really want people that are going to send super-nice signals to the market, people that can attract other people, and people that are going to make it easier for you when you’re raising additional rounds of financing. In this case, it will be the Series A round of financing, which is the next real financing cycle that happens after the seed round.
In terms of terms, you want to make sure that you have the right terms. Once you already have an investor that is ready to come in and to make an investment or perhaps that wants to negotiate with you what those terms are going to look like, you really want to be clear as to how you’re going to be getting that money in. You can either do it via equity, or you can do it via debt in the form of convertible notes or safe notes.
Typically, what I see is that in a seed round, you want to maybe delay a little bit more, especially if you’re just dealing with individuals, putting a price tag on the business, maybe you delay that to the Series A. A good way to do that is via convertible notes, where people are giving you the money, and you are promising them that those notes are going to convert into equity once you have a sophisticated investor that is coming in and leaving your round on the Series A, where you literally have venture capital firms coming in and establishing those terms.
Again, you can choose whether an equity round is right where you’re pricing the business, where you’re putting a price tag that you negotiate with the investor, or perhaps maybe the right round is to delay that process, and putting a structure, really, in the form of a convertible note, which is a form of debt.
The next thing is understanding who you’re going to be pitching at a seed stage. When you’re at the seed-financing cycle, you’re going to be either going after the angels, you’re going to go after angel groups, or you’re going to go after venture capital firms that are investing at an early stage.
Now, you need to be very careful when you go after venture capital firms on a seed stage because typically, the venture capital firms that are coming in and investing at this stage in the game, those are institutions that are putting very small ticket sizes. They’re putting $25,000 here; $25,000 there, so really the spray-and-pray type of model.
The problem with these types of institutions is that as they come in, they give you the money – and you’ve got to remember that here, you’re at the very early stages of building your business. If they give you the money, and then, all of a sudden, the business model changes or you do a pivot, then they perhaps may not reinvest in your next round of financing, let’s say the Series A.
That is problematic because then if they do not reinvest, that’s sending a negative signal to the Series A potential investors that are going to be other venture firms, and then they’re going to be like, “Hold on a second. They’re not reinvesting. Why are they not reinvesting? Is there something wrong with the business?” So, you need to be very, very careful because in many instances, getting a VC firm that comes in at a seed round and puts an investment in your business, that could be catastrophic and perhaps lethal if they don’t reinvest on the Series A. So, be very, very, very careful.
Again, like when you’re speaking with Angels, typically, the ticket sizes are going to be anywhere between $25,000 to $50,000. You may have some angels, or may even super angels that come in a little bit higher in the form of up to like $200,000 or $400,000. Then, you have the angel groups where they’re grouping the investors and coming in and putting investments all the way up to 2 million. In many cases, the angel groups lead the rounds, so you may want to consider angel groups as a good way of financing your seed round.
The investor is going to want to see in terms of what they’re going to be expecting, in terms of like materials, they’re going to want to see a pitch deck. You can see the pitch deck template underneath this video. You’re going to also have to share with them a financial model where you’re projecting, let’s say over the next three to five years, the growth, the assumptions on the business, and so forth.
If they like what they see, then they’re going to give you a term sheet. Perhaps there will be a due diligence process where you’re allocating and putting everything into a Dropbox folder or a Google Drive folder, and you’re sharing that. Then, if they like that, you go into either the convertible note purchase agreement or a form of a note, which is when you’re doing a convertible note or signing their subscription agreement if you go for an equity round.
When it comes down to how you’re able to get all the investors excited, in terms of how you do the strategy, it’s very simple. You just do the research. You see which investors are actively investing in your segment, in your location, and also in your financing cycle. And as we’re saying, in a seed round, which is why you’re raising.
You’re going to get founders of portfolio companies that have received an investment in the last 6 to 12 months, and ultimately, you use those founders to get the foot in. This is all about getting someone that has that layer of social proof to get you into the circle of trust, to reduce the amount of time from the first touchpoint to money in the bank.
Ultimately, as a result of using this strategy, you’re going to use the best source to get you in. Those are founders again that are super incentivized to introduce you because they’re going to need more money in the next 18 to 24 months, so by them introducing you to their investors, they’re adding money to their investors. They’re going to need more money, so by doing that, you’re making them look good, so use those founders to get your foot in.
Again, just go for advice. As the saying goes, you go for money, you get advice, and you go for advice, and you get money twice. So, just go for advice, and then when you have, let’s say out of 50 investors that you’re engaging with, maybe one says, “I think this is interesting. Perhaps I’d like to become a lead.” Then, at that point, you go to the other 49 investors and say, “We just started a round. It’s going to close by x-date. We’d love to have you in. Let me know if it makes sense to share the offering documents with you.”
That’s, essentially, how you’re creating that sense of urgency and how you’re creating that fear of missing our because ultimately, you need to push everyone over the edge in order to make it happen.
With that being said, I hope that you liked this video. Feel free to Like, and also to leave a comment, and to subscribe so that you don’t miss on future videos that we will be launching. Also, remember that the fundraising training is this program that we have where we help founders from A to Z all the way in the fundraising journey. We have live Q&As, incredible templates, agreements, a community of founders all over the world helping each other. So, feel free to take a look, and I think that you will enjoy it. With that being said, thank you so much for watching. Bye. Bye.