You Raised Seed Money, Now What?

In the last 2 years, there’s been a major shift in the startup funding ecosystem as angel investing has been industrialized with the formation of Micro VCs and accelerators. Over 11,000 seed deals have been funded in the last two years alone. That’s a 3x increase from 2010 and roughly 4x more dollars invested in the same time frame. This is both terrific and scary. Terrific because there’s more money for aspiring entrepreneurs. Scary because these talented people are not getting the right guidance on what to do next. Too frequently these days I am meeting incredibly talented entrepreneurs who raised seed funds but never received guidance on the milestones that should be achieved in order to successfully raise a Series A. They are half way through their money or worse and panic sets in about what to do with their remaining funds and time.

So what should a founding team who raised seed money accomplish before attempting to raise more capital? It boils down to three things.

1. Team. Successfully recruit a core group of people who are almost as crazy as the founder(s) and who believe in the mission. Founders are wonderful, visionary optimists full of hope and passion. They often leap when the world tells them they are insane to do so. One of the critical components any Series A investor will consider when looking at a founder is “Is this a person world class people will follow?” Can this person convince A players to leave their current opportunities behind and join this company? In the seed period the founding team must demonstrate an ability to recruit top notch engineering talent to build the best possible product, and typically attract at least two “other” people who have business responsibility. If the founding team is a group of technologists, which is usually the case, it is critical at least one executive with go-to-market experience has been added.
2. Product. Seed pitches usually describe the concept for a product or at best have a working demo. There may be some sexy, animated slides to show what “will be” but rarely is it much more than that. The seed period should be a time when a core engineering group cobbles together at least an “alpha” version of the product. This is a version that is far from perfect or deemed generally available, but can be left in customer prospects hands and used. The seed period should be used to demonstrate existence proof that the idea on the slides has become an initial product and works (bugs are OK).
3. Reference Customers. During the seed period it is absolutely critical that the insight for starting the company is validated. This validation occurs when the solution provided by the company creates a satisfied group of users who are willing to be evangelists and references. The willingness by the users to publicly acknowledge that this new product solved their pain and was worthy of their time is the validation Series A investors want. Is it important that they are paying customers? No. Would it be helpful? Yes. Is it acceptable if the first few customers are receiving a significant discount? Absolutely. Series A investors are looking to see if the seed company has managed to cross that critical, but fine line between “this is really interesting” and “I had to use this.” Why is that so important?Entrepreneurs are normally smart, gregarious and engaging. They are experts in their area. As a result, they can typically have multiple meetings with potential users where there is collective enthusiasm felt by all. Their charm will often inspire prospects to try the product and tinker. But that’s a long way from validation that a true pain has been solved and investors know it. As my friend Joe Sexton likes to say, “It’s easy to get people excited, it’s hard to get their money.” At a minimum a seed funded company must deliver satisfied users who demonstrated willingness to invest meaningful time and will go on record saying this new product solved a critical pain. To the extent a seed funded company has paying users, it signals less risk in the business going forward, which directly translates into a higher value a new investor will assign to the company.

The rise in seed stage companies is a fantastic trend. It means the entrepreneurial ecosystem is thriving like never before. But all this money flowing comes with responsibility too. For you founders out there who have been able to attract seed funding, make sure you clearly define the goals to accomplish during this period with regard to team, product and customer validation. Onward!