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?
To answer this question, I’m going to explore what a seed round is, why it is important to startup founders, and the steps you should take to maximize your chances of securing seed round capital.
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.
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.
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.
ACCESS THE PITCH DECK TEMPLATE