Panel Summary: Raising a Seed Round
Note: The following represents my own learnings from this panel and should not be assumed to accurately represent the official beliefs of any of the individuals or firms mentioned herein without further corroboration.
Last week I had the pleasure of attending a panel hosted by Dev Bootcamp NYC on the big topic for early entrepreneurs looking to make the next jump: raising a seed round.
The insightful and refreshingly candid panel consisted of Andrew Ackerman from Dreamit Ventures, Josh Kuzon from the upstart FinTech-focused Reciprocal Ventures, and Thomas Nicholas, CEO of Alloy (Techstars NYC Barclays ’15).
Here are some of more interesting takeaways:
What do investors look for?
When meeting with an investor, the key is to make them excited about your startup. Investors ultimately invest in what they ‘believe in.’ Getting investors excited is also the key to creating a buzz around your funding round and receiving better valuations. If you do this well and get a bit lucky, Ackerman suggested, the investor will be looking for a reason to say ‘yes’. 95% of the time, however, investors are looking for a reason to say ‘no’. That doesn’t mean they won’t fund you, just that you will need to run the gauntlet before they commit. Make sure you know your market extremely well, and can speak to every startup or major corporate initiative that sounds even vaguely like it addresses the problem your own startup looks to tackle.
Make sure they get the right takeaways
Nicholas added the caveat that it’s common to get an investor very excited, only to have them pitch the idea to their partners and fail to emphasize the things that truly make your own project distinct. The result may be another partner listing the handful of reasons why the typical startup in your space fails, thus canning your prospects. Not only do you need to sell the investor that you pitch, you also need to give him or her the crisp and concise pitch he or she needs to sell the other partners.
You need to raise when you have some kind of momentum
It can be tough to interest investors when your company has been stagnant in the run-up to your fundraising. This can be challenging, since founders may be inclined to pickup their push for funding only when they start to feel the need for extra capital get over a certain hump. This momentum can take various forms, depending on the startup, e.g. completing an accelerator or signing key customers. Nicholas added that it’s critical for founders to remain proactive in managing their fundraising timelines, since a typical round will require at least 100 investor meetings.
The Series A crunch is really about excess seed funding
There’s a lot of hype surrounding the startup world today, and it’s natural to wonder if the startup ecosystem is currently in a bubble. However, the panelists agreed that the “Series A crunch” we’re seeing today is a byproduct of an excess of seed and angel funding (check out Dreamit’s own post on the topic). While Series A financing has increased in dollar terms, the abundance of funding from angels and family offices has outpaced the corresponding increase at later stages. This means that more startups get past the seed round, but proportionately fewer of those startups raise an A round. On the balance, though, the panelists believe this is a good thing. As Ackerman put it, he’d rather have more startups get a chance to succeed and have them winnowed out later than to have them locked out at the seed round.
Do not ask for an NDA!
This is an easy one, but this mistake quickly exposes amateur founders. VCs see far too many startups with similar ideas to be willing to expose themselves to the legal risks posed by signing an NDA. Most will quickly pass on a startup that requests them to sign for non-disclosure.
You need to move on from a part-time situation to succeed
When one attendee rose to ask about how to grow her startup while keeping her full-time job, the panelists were quick to make it clear that a startup cannot achieve real growth while the founders are working full-time jobs. The priority for any founder should be creating a situation where it is feasible for them to leave their jobs. This might mean going for an accelerator, prioritizing being cash flow positive over growth initially, or seeking funding right away.
Only a handful of accelerators are worth it
While accelerators can be great places for entrepreneurs to focus on their startups at an early stage, these programs can also be very expensive for founders in terms of equity. The panelists stressed that unless an accelerator helps you raise capital, it’s probably a waste of money, estimating that only 10–20 or so might be worth it (those mentioned by name include Techstars, Y Combinator, and of course Dreamit). Ackerman drew the analogy to an MBA, where only the top 15–20 MBA programs tend to add value to their students’ lifetime earnings once the costs are taken into account.
Further reading recommended by the panel
Jeffrey Bussgang’s ‘Mastering the VC Game’