Are you ready to raise seed capital? Does your start-up venture have the makings of the next big success story? Perhaps you’re through the ideation phase and have laid the foundation for your American Dream.
Now, it’s time to finance your project and you’re looking for leads to take things to the next level. It is no secret that a start-up’s trajectory is often most clearly defined by the entrepreneur’s ability to raise capital for their business venture. This article will serve as a guide for founders in search of those critical seed funds needed to grow their venture.
Funding Rounds: A Brief Overview
There are five rounds of funding in the successful launch of a startup business venture:
In this preliminary round, also known as the Seed/Angel round, founders focus their efforts on raising seed capital, also known as seed money, which refers to the initial funds needed to start a business venture. Most often, these funds are acquired through friends, family and the entrepreneur’s’ personal assets. Unless the founders are independently wealthy, they will seek the guidance of venture capitalists and angel investors to advise them throughout the seed round.
Series A Funding
This stage of funding is defined by high risk/reward investments as founders seek anywhere from $2 to $10 million while still in startup or product development mode. The funds raised during this round set precedence as founders begin to consider potential partners for the company’s board.
Series B Funding
Series B funding is defined by a higher company valuation lending itself to higher investment costs. At this stage private equity financiers and venture capitalists are focused on customer deployment, growth in revenue and product success.
Series C Funding
In this round of funding, the start-up stands to earn much larger sums of investment (ranging from $30 million and above) as a means of spurring rapid growth. This stage is specific to companies with proven market success who are ready to scale up, expand their products and services or earn a greater market share.
Initial Public Offering (IPO)
At this stage, the start-up venture begins to sell stock by offering debt or equity on a public stock exchange introducing it to thousands of potential shareholders.
Seed capital: Why do you need it?
All start-up ventures will be limited or launched by the founders’ ability to raise those critical funds to get the venture going. These initial funds will cover early-stage operational costs such as market research, product development, product production and attracting prospective venture capitalists. The level of investment earned during this stage of funding is dependent upon the founder’s skill-set, business acumen and track record, as well as the product’s service and benefits.
Calculating costs: How much do you need?
Before beginning the process of raising that sought-after seed money, it is critical to lay a financial framework clearly defining the initial operational costs and what the money will be used for. These costs will include, but are not limited to:
- renting office spaces
- acquiring necessary permits and licenses
- developing the product
- manufacturing costs
- hiring a team
- marketing campaigns
Determining this number will require extensive knowledge of your market conditions as well as understanding the biggest potential risks to be faced by your start-up.
The goal should be to raise enough money to get your start-up to an accretive milestone. In other words, enough to get your start-up to a higher valuation.
Average seed round funding
According to Crunchbase, there is an upward trend in the amount of seed-funds raised as start-ups and their investors begin to favor generating more funds before advancing to Series A funding.
The average seed round size for the first half of 2016 was $1.14 million, seeing an increase from the previous year’s $947,000. This growth is setting a new precedent in which seed-stage funding is becoming increasingly like its Series A counter-part. Crunchbase CEO Jager McConnel notes:
Startups are raising more seed tranches and closing larger Series A rounds when they do. That puts pressure on seed stage investors to put more capital to work, particularly as the expectations of a tougher funding environment means founders will need to stretch their dollars further.
How to raise seed capital: A step-by-step guide
The route to funding is highly individualized and no two seed rounds are completely identical. As such, it can be difficult to set expectations. What founders will know or come to learn, is the momentum-based nature of fundraising as it builds and grows upon successfully getting those initial “anchor” investors on board.
Due to the at-risk nature of businesses in the seed capital stage, banks and venture capitals may be more hesitant to fund start-up ventures, choosing instead to wait until the business is more established or until they see other respected investors get on-board. Generating momentum often lies with the founder, trying to convince potential investors not only of the value of their product, but in most cases in the value of the founder themselves.
So how does one get started?
Become an Industry Expert
A well-prepared founder will be well-versed on their market and industry. He/she:
- reads avidly and is well-versed on the subject matter covered in publications. See Forbes’ 8 Must-Read Publications for Entrepreneurs
- Follows investors and start-up experts on social media channels like Twitter and Facebook.
- Extensively researches potential investors with a firm grasp on their portfolio and interests.
Find A Lead Investor
Who is a lead investor? This is the first person to invest in your venture. An ideal lead investor will be well-connected with an extensive social network, have a respectable reputation and be a passionate supporter of your business venture.
Finding this person is oftentimes the most difficult and time-consuming, yet significant step. Founders must become comfortable with the idea of going beyond their social comfort zones to grow their networks in search of potential lead investors. They must be unafraid of approaching angel investors and venture capitalists directly.
Adeo Ressi, founder and CEO of the Founder Institute identifies the best way to build a relationship with a potential investor
- Inviting for coffee
- Sending a news update
- Meeting for an event
- Inviting for lunch
- Asking to become an investor
- News update
Define Your Terms
Before entering any agreement, founders should ensure they have laid a concrete legal framework for their venture. This includes meeting with an attorney to safeguard the business venture and establishing an investment strategy that meets both founder and investor goals.
Build your “Angel” Dream Team
At this stage, founders should begin to devise their dream team of investors. They can begin to do so by turning to resources such as CrunchBase, AngelList and Merging Traffic platforms with a curated community of startups and investors designed to make fundraising more effective.
The ideal team will be comprised of investors with a history of experience investing in the desired sector.
Perfect Your Pitch
A pitch deck is a brief presentation used to showcase a quick overview of your business plan. With millions of dollars on the lines, the entrepreneur has an average of ten minutes to convince the prospective investors to buy into his/her vision.
- Company purpose
- Why now
- Market size
- Business model
And they focus on these three critical components:
Less Is More
As the old adage goes, time is money. An investment pitch is not an opportunity to delve into great detail on the inner workings of the start-ups business plan. The perfect pitch is concise, favoring graphics and visual charts over text-heavy, bullet point-laden slides. Keep in mind, investors will spend an average of 3 minutes and 44 seconds reviewing your pitch deck.
Numbers, Numbers, Numbers!
Investors are seeking value for their funds. A great pitch will quickly convey the start-up’s viability with well-researched financial statements showing a firm grasp on three projection models: best case, moderate case and worst case. Each should be based on facts, performance data and market research highlighting industry and competitor analyses.
When pitching their start-ups, founders must remember to pitch their most crucial selling point: themselves. As humans, we want to surround ourselves and work with people we like. The most successful pitch will create a personal connection with the investor.
If you’re an early stage company looking to get some exposure and raise seed capital, learn more about Merging Traffic and their platform to help match entrepreneurs with Accredited Investors.