Seed Funding: Ultimate Guide to Raising it
Last Updated: 1/2/2022
Getting seed funding can be challenging for startups because they lack assets, have no records, and often have little to no product or user base. Usually, a big chunk of seed money goes to software and business development, leaving little returns for investors.
To get seed funding, you must justify the viability of your idea through proper planning and preferably a working prototype with market feedback. The potential investors expect you to prove your business concept before they decide to invest.
Best practices for seed funding:
Refine and research your business model
Typically one of the most important elements to your pitch deck — preparing one entails strategizing on how you will create continued value for your customers. Before you pitch — you should know where your idea starts, how to progress, when to succeed, and how you will create value for your customers.
Here are key components to a business model:
Finding the best product/market fit: You must find the best product that fits your market. Present the product to customers for testing and collect feedback on how to make it better.
It is crucial to determine the size of the market for your idea. Do thorough research to establish the level of competition and demand for your product/idea.
Before you enter the market, ensure that your value proposition aligns with the distribution channels and customer needs. Also, take a look at similar companies to yours that previously raised seed funding. If you cannot find them, ask yourself why not.
Understanding the customer and the target market: Identify the target customer representing the people likely to benefit from your products. To determine your ideal customer, you can segment the market and then test your product based on that. Generally, seed funding is based around product-market fit, and you must understand the customer in order to demonstrate this.
If you want to understand the customer and the target market, you must analyze your product, study the competition, choose the segment correctly, and conduct market research.
Understand the potential size of the market: It is vital to familiarize yourself with the total number of potential buyers for your products and the total revenues you are likely to generate. You may define your market size based on the geographical location or by sector.
Determining size will help you estimate the profit you will earn from the business and the number of people to hire. Such earnings estimates will help potential investors to make informed decisions on whether to provide you with the requested seed funding.
Being aware of the market’s potential size will help you know whether you are ready for seed funding. If you have not built your MVP, it is essential to do it and get results to understand the prospective customers’ behaviors.
To actualize your MVP, present the product to customers and note how they behave with the commodity or service. If the product is complex, build your MVP through family and friends.
It is crucial to have a few people in your team to help you with validating the MVP and estimating the market size. Doing it alone is challenging, and it may take time to accomplish your goals.
Preparing your pitch materials
Getting seed funding requires adequate preparations and supportive documents. Here is what you are supposed to do to prepare your pitch materials. Presenting a quality pitch deck will increase your chances of getting funded. Before you offer your pitch deck, allow professionals, such as editors and financial analysts, to scrutinize it.
Prepare a seed funding pitch deck
Preparing a pitch deck refers to putting a more concise and visual version of a business plan in PowerPoint slides for ease of presentation to your potential investors. Seed funders need to get a quick synopsis of your concept ahead of the exhibition; therefore, avail it to them before the presentation.
When preparing your pitch deck for seed funding, ensure that you use charts and other visual assets to communicate your ideas effectively.
Based on the Guy Kawasaki Pitch Deck Outline, a seed funding pitch deck should comply with the following.
10 slides: It is advisable to use a maximum of ten slides when presenting your concepts to the seed funding investors. Under normal circumstances, it can be difficult for people to comprehend more than ten concepts in a single sitting.
20 minutes: Although a regular presentation takes about an hour, it is advisable to present your idea in twenty minutes and allocate the other time for preparation, questions, and discussion around your seed funding.
30 point font: A thirty-point font is adequate to cater to your audience’s interest. When preparing your pitch deck, bear in mind that some of your potential investors might find it difficult to read small font sizes.
Prepare a financial model
To convince the investors about your idea’s viability, you need to prepare financial documents showing your revenue forecasts, operational expenses, use of capital from the seed funding, and cash flow.
Here is a summary of what your financial model should have.
Revenue projections: Explain to your audience where your revenue will come from and its duration to generate it. You can project your income in five years and convince your investors what you will do to get it.
Operational expenses: Under normal circumstances, operational expenses increase as the company grows. Demonstrate to your audience what will constitute your operating expenses and what you will do to manage them. You need to explain how salaries, product costs, and overheads will vary your business’s growth, but remain conservative during the seed funding period.
Cash flow: Your cash flow projections should give clear details regarding how cash will flow in and out of your business during the seed funding stage and beyond. To convince the investors, you need to let them know that the projected cash flow is adequate to sustain business growth.
-) Backup all assumptions with third-party data
-) Do not attempt to be overly detailed at this stage, give high level assumptions that demonstrate the business has the potential to be scalable and profitable
-) Have a good handle on your expenses and be prepared for extra unforeseen ones
Finding and pitching investors
For your seed funding to be a success, you need to have a viable idea, an excellent pitch, and a quality investor. A good seed funding investor should be one who is familiar with your business’ area of operation and who can advise you throughout your business’ growth.
When presenting your pitch deck for seed funding bear in mind that investors rarely sign the NDAs documents and understand them that way. Depending on the nature of your business, determine the amount of funds to ask for.
There are generally three types of seed funding investors:
First, whenever you take capital, you need to ensure that all investors are accredited, if you are unfamiliar with investor accreditation requirements, please see this article.
- Friends & Family: This can be your biological family and friends, often referred to as business associates.
- Angel Investors: This encompasses professional angel investors that are make seed funding investments on their own behalf, or by managing third-party money.
- Seed Funding Groups: This includes angel syndicates (I.e. groups of angel investors), startup accelerators like YCombinator that also give capital, and venture capital firms that invest at the seed stage.
Methods of Finding Seed Funding Investors
Consider using your existing relationships: Contact your business associates, alumni networks, or your cofounders and let them know your business idea. You may also approach any university that has a strong network of investors from their faculty or alumni. Request them to connect you to their systems.
You can send cold emails to your prospective investors with a summary of your idea and how you intend to solve the problem. You can also use LinkedIn to connect to various investors through the investor list.
If you have contacted many investors but failed to get a positive response, find out if there is something you are not doing right. You may consult friends or any business expert for advice.
Negotiating with investors: Knowing how to negotiate with your investors will help you secure funding quickly. You should enter into the negotiating table with flexibility and an open mind. Funders are known to impose stringent conditions before investing, but your professional negotiations will make them soften their hard-line stance.
Seed round startup valuations: Determining how much money you need for your business and how much to delegate to future rounds is a crucial step towards your startup’s valuation. Knowing the value of your business is one of the vital requirements that funders consider before investing.
To build an effective pitch deck, you must consider the amount of capital your business requires, the proportion of the company you intend to sell, and the type of valuation you plan to use.
Note that your startup value’s primary determinants are the market forces and the investors’ willingness to pay a premium. If you want to get a better valuation, you must pitch your idea to many investors and get them interested in your startup.
The general rule of thumb requires founders to sell 10% — 20% of their stake in the company. The simplest way to value your company is to multiply the amount of money you want by three.
You can value your startup based on your competitor’s history. For instance, you can analyze your nearest competitor and mirror their valuation.
-) If you don’t have relationships, establish an advisory team to help you get the right investor.
-) Avoid cold contact the investors, try getting an introduction.
Startups find it challenging to get seed funds for many reasons, such as lack of collateral and poor business track records. Fortunately, some investors are willing to fund them despite such challenges. To succeed in getting seed funding, you must prepare and present a compelling pitch deck to your potential investors.
Commonly Asked Questions
What type of seed capital investors should I seek?
When raising capital, there are different classes of investors that tend to have their own unique style you need to be made aware of:
- Family Members: A common form of pre-seed funding is from family members, this capital is typically used to prepare at least a demo to show investors you are technically capable to deliver and prepared to go to market faster. Typical check size is under $1 M.
- Angel Investor: These are the most common seed investors, angel investors focus specifically on the seed stage. They are either comprised of individuals, groups of individuals, also called Angel Syndicates, or funds in some cases. For more information on angel investors, see this article. Typical check size is $250,000 — $3 M
- Venture Capital: Raising seed funding from venture capital firms is not too different from raising capital from angel investors or other sources. The primary difference is venture capital tends to be more structured and organized. Typically, they also invest in later stages, seed funded companies only comprise a fraction of most VC funds’ portfolio allocation. Typical check size is $1–5 M.
What is Pre Seed Funding?
In many cases people have asked us, how do I raise pre seed funding? First, pre seed funding is capital raised before your seed round. The criteria you must traditionally meet is lower than typically seed funding. However, fewer investors are available to allocate.
Raising Pre Seed funding for your business venture is typically done by using personal capital or family & friends. In some cases startup accelerators exist to help with capital or resources. For many, however, this can be the most difficult funding round to raise from traditional venture capitalists.
How much seed funding should I raise?
This really depends on your requirements and stage. The average seed funding round ranges from $1–3 M, but we have seen them as low as $250,000 or as high as $10 M. Typically, they fall within this range however, because the funds are intended to help you finish or introduce the product and gain enough traction for your Series A round. Raising money too early can have consequences because your valuation may be lower. For more information on startup valuation, see this article.
Do I need to prepare anything else?
Generally, investors may have questions after you initially pitch them, or may ask for something more brief than the pitch deck.
Therefore, it is helpful to be prepared with the following:
- Executive summary: The executive summary for seed funding should be done in a one-page document to highlight your business plan’s content. Ensure that you condense each key area of your business in one or two paragraphs to enable the investors to understand its content quickly.
- Business Plan: Not all investors will request a business plan, but they will have questions, so we recommend at least preparing a more lengthier version of your pitch deck to be prepared for them.
- Data Room: This helps investors with their due diligence should they decide to prepare a term sheet. It includes a volume of information including technology descriptions, full team bios, legal contracts, and financial records.
Should I form a C Corporation or LLC?
Incorporating is not necessarily required for seed funding and is often done at a later stage starting with an LLC for simplicity purposes.
The advantages of a C Corp is the different stock classes and options pools they offer. Unlike limited liability companies, C Corps offer both Common Stock and Preferred Stock (typically offered during seed funding), which gives investors more flexibility over their investment structure.
However, this may not be necessary since many seed funding rounds do not offer equity directly, but offer term sheets through SAFE or Convertible notes.