Raising Seed Capital? Here are 3 things you need to know before raising funds.

Photo by Nick Coleman on Unsplash

Should you even raise money? Seems like a simple question but so many founders seems to get it wrong. We want to shed some light by sharing our learnings and experiences. Our goal is that this would help you to think more analytically about your startup.

First, let’s get the fundamentals right. You don’t need to raise funds to be a startup. Starting a startup is hard, irrespective of where you start or when you start. So entrepreneurs have built tools to simplify the journey. If you look hard enough, you can find ways to bootstrap almost all your requirements.

The beginning of a startup is always exciting. It’s usually this excitement that drives founders to raise money from the start. You must avoid this temptation early in the day. At least until you have validated product-market fit. You must get your hands dirty before asking someone to risk getting burned. Once you know what to solve, funding can accelerate execution.

The difficult part about running a startup is knowing what problems to solve, which problems are worth solving and which problem to solve first. What you see as the problem is almost never the actual problem.

1. Why should you raise money

You need money to pay bills, salaries and to keep the lights on. But you can’t be raising funds purely to cover costs. Funding should allow you to reach specific goals and milestones. These need to signal a sense of progress & growth. Achieving them also reduce the risk of failure over time. Stating that you’re raising money to grow isn’t enough.

Ensure your goals and milestones are realistic. Reaching them should allow you to reach the next funding round. e.g. for early-stage startups, it might be points 1 & 2. Your next round might be to reach points 3 & 4 and so on. Avoid raising a large round to cover all 5 points in one go!
In helping startups raise funds, we look at an 18-month window. We measure where they’re now and where they need to be in 18 months and work backwards. We do this via a financial model that captures the assumptions that govern the startup. The model generates a monthly forecast on the cost & revenue structures. It also tells us how much we should be raised and for what equity percentage. Finally, it provides insights needed for decision making and answering investor question.

2. When should you raise money

If it’s not already obvious, there is no universal answer. It depends on the circumstances surrounding each startup and the domain. Secondly, it depends if the founders are ready to receive external funding. Funding comes with an enormous amount of accountability and pressure. Make sure it’s something you able to digest!

The most important lesson a founder needs to learn is how to manage money and to run a lean operation. This will become an attractive train when you do start raising capital. Remember, earlier money costs more in equity than later money.

Secondly, know that the process takes time. Far longer than you would expect. So make sure you enough runway to go through the process without becoming desperate. You should ideally look for strategic investors who can add value. When you sound desperate, strategic investors tend to run away.

Most early-stage startups don’t require funding, they need a better strategy. A strategy that would allow them to build their startup via customer capital. Hence the best time to start the process is when you have traction. Traction can mean both paid and unpaid users. You must know which channels you can use to acquire them. The cost associated with each channel and how long they will be users. Measure and monitor all the KPIs associated with your startup.

3. How much should you raise

As mentioned above, fundraising is set up around specific milestones. And the financial model should reflect all the cost associated with achieving those milestones. Note that these milestones also need to be attached to a timeline. We noticed that it takes founders at least 6 months to get-going once they receive funding. What we mean by get-going is them hiring talent, buying equipment etc. Once you’re settled in, you need at least 12 months to hit the KPIs you promised.

If you’re raising your seed or angel round, spend time working on a financial model that would get you to a cash flow positive position in about 24–36 months. This can be achieved through cost optimisation and unique customer acquisition strategies.

In a startup, you’re always required to do more with less. It’s cool to raise a million dollars but that’s not going get you, customers. And if you don’t have enough revenue coming in by the time end of the round, you’re in trouble. The goal is to raise enough money to get to the next fundable milestone. In mature markets, a startup will be diluting 15%-20% during each round. From our experience, we know that this ranges between 15%-30%. Of course, you can structure a better deal around KPIs. We have done this successfully on a few occasions.

Thank you, for reading till the end. If this was helpful do give us a 👏. We will be running a workshop on pitching, fundraising & financial metrics toward end of April 2019. The session will be conducted by a venture capital professional who drives strategy for Asia’s leading early-stage VCs. If you would like an invite for this, please email us at info@crowdisland.lk

If you’re a budding entrepreneur who’s building a cool startup, we would like to hear from you, please click here. If you’re an investor looking to fuel the entrepreneurial revival, click here.