3 Critical Ingredients to a Successful Seed Funding Round
“I am looking for advice on raising money for my new company,” said Eli Sethre, the founder of aFundia, a member company at the ATDC.
At 34 years old, Eli is an impressive first-time entrepreneur. He is intelligent, well spoken and clear on how his company will serve his market. He has a little over 10 years’ experience in the B2B high-risk lending business, and he is ready to launch his own company, not as a lender but as a data analytics company for risk assessment. He knows to whom he is selling and is crystal clear on the selling proposition.
“What is it you are trying to achieve?” I asked.
“We want to build a company which will help our clients grow their businesses. Our clients need sophisticated risk assessment data to get to their next level of growth and profitability. Without it they won’t be able to grow as fast as they’d like. They need us and the SaaS analytics service we will provide.”
“Based on your industry experience and initial clients, I have little doubt you are on to something exciting. You have a handle on your customer acquisition costs and customer lifetime value,” I said.
“Right now my co-founders and I have contributed a moderate amount of capital. We are not taking any salaries and plan to contribute our sweat equity until the product is ready in March 2016. Then we will begin to take salaries,” Eli explained.
Eli proved to me he knew his business economics. He didn’t need to show me his financials. He convinced me he knows how to run a business for profitability. He proved it through his experience in the industry and his grasp of his projections at a high level. He also showed his sensitivity to cash when he told me the salaries they would expect in the early stages.
“How much money do you need to get you to cash flow positive?” I asked.
He said, “I think we need somewhere between $750k and $1mm. This working capital combined with our anticipated sales over the next 24 to 30 months should get us there.”
“This number sounds right to me given the plan you shared for growing the company in this market. Would you look to raise it as an initial angel round or will you raise it on milestones?” I asked.
“I’m not sure, but right now I’m thinking that we raise a small amount, followed by a larger amount in about six months,” he explained.
“Will you and your co-founders participate in the angel round?” I asked this because this seed round will cost substantial equity. This will be the highest-risk capital in the deal.
“There’s a possibility that one or both of us will contribute additional capital, but for discussion purposes, at this point we’re assuming that we are not, and that the round would come from angel investors,” Eli answered.
“By spreading the investment in two tranches, you are accepting higher risk. You will hold on to more equity, but you will have to hit your milestones. Do you get that?” I asked.
“Yes,” he replied.
“Do you have anyone interested in investing at this time?” I asked.
“Yes. I have been introduced to a few angels.”
I explained, “Be careful here. Be strategic in your fundraising. Because of your industry experience and early customer contracts, you are an attractive investment. When you allow people to buy into your company, they are the equivalent of co-founders. They are with you for the life of your company. You are married.”
I recommended he develop his seed funding strategy. It needs to include:
1. A lead angel investor — This is someone he connects with who, hopefully, knows his industry or the SaaS analytics business and cares about him and his future. The lead investor puts the final fundraising strategy in place and develops the term sheet. He is in your deal with you as he will help raise the funding and close the round. He should add credibility to the startup and be a coach to you as a new founder and CEO. Later, they will be the lead, with you, on future funding rounds. A partner and co-founder forever.
2. A recognized industry leader — This can be an individual or a company who is a recognized and admired industry expert. His credibility will be valuable in securing the next round of funding. The next set of investors will automatically transfer his industry credibility to your startup. They will think, “If he is in it, then it must be real.” This person will also open doors to new customers in the industry.
3. Other money — These will be high net worth individuals who are following the lead investor. People he knows and trusts. Investors who will follow the advice of the lead angel and provide a base of assets for future rounds. They provide future security for your new company.
Eli is an experienced manager and will be a good operator. He has assembled an experienced and qualified team to get the company launched, product developed and initial customer contracts secured. Now he needs to focus on rounding out the team by recruiting the right angel investment team. A team led by a great lead angel. Go Eli!
Originally published at Paparelli.