Why startups should raise a Seed round of financing?
Recently some startups have skipped raising a seed round. Some have done very well with this strategy and spending the first few years bootstrapping a startup. There is no doubt that there are tens of thousands of other attempted startups that you’ll never hear about again. They ran out of money and got vaporized.
We are also dealing with the fact that our world has recently changed and perhaps the business plan of most founders did not account for that. At least we are in a new phase in terms of capital markets, the economy, and the startup ecosystem. Here’s why most startups should be raising a Seed Round. As well as why some shouldn’t, and the when, how and how much if you do.
Starting Up A Business Takes Money
No matter how little you think you can start a business with, it still takes money. It normally ends up costing a lot more than you think and taking a lot longer to get income in the door.
At a minimum, you are going to incorporate your business, need WiFi and devices, fund a business bank account, create a product, and hire some help. You’re going to need a logo, web domain name, and some basic marketing and branding fundamentals.
If you are going to try and bootstrap, you need to make sure you have substantially larger cash and credit cushion than you expect to spend.
A Successful Startup Requires Even More Money
There is a massive difference between tinkering with the idea of a small hobby business and launching a fast-growth startup with huge potential.
A real ‘startup’ needs even more funds to be able to go faster and hire the best possible team in the industry. It takes time to fine-tune a business model, and that means operating capital to support months and even years of development and iterating.
You need plenty of cash to ensure you don’t go broke right before you make it. Consider that around 90% of startup attempts fail because they run out of money, and it’s easy to see the top difference is those who have the extra funding, or not.
It’s not enough just to have a little funding and lean approach that lines up with your optimistic expectations. You need to be able to weather unexpected and perfect storms. Like the coronavirus and hurricanes, and recessions.
When To Raise A Seed Round
When is the right time to raise a seed round?
It will somewhat depend on the venture itself and the market. Some types of startups need very little cash and runway to get going. Others have tremendous needs to just develop a prototype, or months or more to land their first enterprise customer.
After interviewing 200 of the most successful entrepreneurs and CEOs on the DealMakers Podcast, I’ve seen many who have gone out to raise large amounts of pre-seed money before they really punched the go button.
More traditionally, most startups are probably looking at raising a Seed Round once they have product-market fit, some customers, and 10% week over week growth for at least several weeks in a row. Having some revenues will make you ask even stronger. This is really part of understanding the process and how financing rounds work for startups.
The stronger you are when it comes to the ask, the better terms you can negotiate, the more money you can get and less of your company you’ll have to give up at this early stage.
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
How Much Should Your Startup Raise In A Seed Round?
While it is good to know what comparable startups are raising at the same stage, focus less on the dollar amount, and more on your individual startup’s needs.
Aside from the money, this also includes the value you can bring in from new equity stakeholders.
When it comes to calculating your ask, there are two formulas to use. In recent years, when capital has been loose and rounds plentiful, raising just enough to get to another round 12 months down the line has been enough. Don’t get stuck on these ‘rules’. Things change fast. They typically aren’t in the mainstream news for quite a while after things have changed.
In more challenging times, you may need to raise enough for a 12 to 24-month runway to be on the safe side and give you more of a cushion.
It’s far better if you can get enough money in at this stage to get to profitability. If you can do that, you can survive without ever needing to raise another round. If you can, it is a nice added bonus.
These changing trends also include the changing demands of raising a Series A round. You simply don’t know if the market will be there to go right to an A round when you have the data to warrant it. No one does. Without a Seed round, you may never be able to reach the level required by Series A investors at that time. If you need extra help raising a Seed Round now, find the best fundraising experts you can and recruit them. Raise now and keep the money in the bank if you don’t need it yet.
The Cons Of Raising A Seed Round
There are some potential cons of raising a seed round that founders should be alert to.
This includes giving up a big chunk of your business for little money. It’s worth asking if $2M to $5M is really going to help you get far. Especially, if you have to give up 25% of your equity to get it. Will it be enough to hit Series A level milestones? Will it limit your flexibility, profitability, and sustainability? You could also have big pivots to make ahead. Will these investors be onboard for it?
If you are ready, then who will fund you? It may be angels, select VCs or even the public through a crowdfunding campaign.