Raising Seed Capital

An Angel investor’s perspective on raising Seed capital for your startup.

Let’s get one thing out of the way quickly, the following tactic is not how to raise capital from Angels.

Selected this example because the sender clearly has ‘1 mutual connection’ and yet it wasn’t worth their time to use that connection to get a warm intro.

Cold introductions are infertile ground.

This is true not only of capital but most other lead types also.

With that out of the way, one way to approach the question of Seed capital for your startup is to understand what it isn’t.

Seed Capital is not

• a way to fund building your minimally viable product
• a way to avoid using your own cash to get started
• a bridge loan to your SeriesA funding
• a way to get free incubator office space

Seed Capital is…

Money to help raise a toddler.

Allow me to explain.

There comes a time when your startup reaches a point where its product/service (I’ll simply refer to this as ‘product’ henceforth) has shown real value to early users. Understanding how users get value from using the product is most of what’s going on. This isn’t an ‘MVP’ but rather some evolution of that.

Why the toddler you ask? The toddler is a very young child whose primary activity is exploring things.

All startups reflect the energy of children, mature businesses reflect the energy of adults.

If most of what your startup is doing, productively, is learning from users, then likely it’s in the toddler stage. Prior to this the predominant activity was building/testing the early product and beyond this stage, while learning from customers never stops, the primary activities shift elsewhere (eg. repeatable sales, scale, growth leverage, etc.)

To gauge this, simply measure where Founders spend most of their time over a 2-week period. The typical toddler spends most of her awake time crawling around, touching things, making mistakes, learning about things all around her environment. No much else she does is productive — except sleep.

Seed capital is funding to get from the toddler stage to the business patterns inherent in a SeriesA funding. This depends on the type of business and the capital markets, as well as other factors. What will it take to capitalize your toddler? A biotech startup bears little resemblance to a B2C software startup in this regard.

You need an understanding of what SeriesA funding for your startup will expect and a ‘map’ of how to get there with Seed capital.

We don’t need a lengthy presumptive business plan, nor a SWAT analysis or ‘market research’. What’s needed is a set of assumptions, over time, over the traversal of desirable ground. Your map is not about why the idea is worthwhile, it’s about how you will make it real.

Use shared documents/worksheets to show the details of what you expect. This is about iterative collaboration. Assumptions towards each step are measurable. The ‘desirable ground’ is what you believe provides the basis for additional funding.

This is ground you have not yet traversed, but there are lots of known-unknowns there.

High quality Seed investor questions

Think of your dialog with prospective Seed investors not as an ‘exam’ but rather as a way to engage them and get to know each other. Rather than just presenting to them, you must get them to iterate with you on your assumptions. If they don’t, really, then they don’t care.

Make sure a prospective investor gives a shit.

These questions are ones Founders must first ask themselves, and they surface in high quality Seed investor dialog. Arriving at such questions assumes that the investor finds you, your idea and your vision compelling.

• What do you expect your startup will need to substantiate a SeriesA?

This again depends on the business but get into specifics, eg. MRR, run-rate, customer growth, and refer to current capital market trends. When will you need this next round of capital, ie. how long is your “runway”. Avoid hand-waving, you will thank yourself later.

• What steps do you expect to get there? How will you measure progress towards each milestone?

There’s almost never a straight-line from here to there, the answers feel like a chart with vantage points from which you can measure and alter course as necessary. Each milestone deals with factors you can and cannot control.

• How does the Seed amount you are raising align with these assumptions?

What will the Seed capital be used for in this journey? Where are the known risks and how do we mitigate? How will the Seed capital last for the runway needed? And how can the Angel investor help you with some of the milestones, eg. industry connections, early hires, etc.

These are the same questions the Founders and early teams are always thinking through.

Founders are the first investors in any startup. If Founders are able to fund the startup through Seed stage — then they should.

If the amount of Seed and the map to SeriesA don’t make sense, or only make sense with an unrealistic set of assumptions — you are setup for failure. Embarking on a path like this is a great way to face a SeriesA while running out of cash — precisely what Founders (and Seed investors) need to avoid.

Not all money is the same

Dumb-money is a startup sin. Let’s start there.

If your prospective investor isn’t asking any of the questions above, it may be for reasons that you should pay close attention to.

The ideal Seed investor is strongly aligned with Founders on how to de-risk the startup to a SeriesA financing. The depth of ‘strongly aligned’ is important, it takes time to get there, and this is time to make sure chemistry is solid.

A common question is whether or not to raise Seed capital from VC firms. There’s not an absolute answer to a question like this, but the following things you can count on:

• a large fund VC firm naturally views a Seed investment as an ‘experiment’, don’t expect a lot of attention from them near-term
• if the VC that funded your Seed doesn’t offer to lead your SeriesA, most other quality firms will take note of that (in a bad way)
• a Seed investment is never a commitment for further funding (see first bullet point)

And don’t bother asking if Angels are ‘better’ than VCs for a Seed round, that’s the wrong abstraction level. It depends on the individual investor and how aligned they are with what you are doing — and where you are going.

5 Steps to Raising Seed Capital

a) Get to the ‘toddler’ stage — fund that as far as you are able to as Founders, then draft your map to SeriesA.

Most common mistakes:

• raising Seed capital prior to achieving toddlerhood
• kidding yourself about your MVP product being sufficient to raise Seed
• not having a clear sense of what it will take to raise a SeriesA

b) Get warm intros to quality, high integrity Seed investors from your network, make nice.

Most common mistakes:

• wasting time with cold approaches
• not back-channeling prospective investors
• assuming a group or a firm connotes quality rather than the individual

c) Spend quality time with each prospective investor, iterate with them on your draft plans, in detail.

Most common mistakes:

• death by pitch deck — never leaving presentation mode
• ignoring warning signs when iterating on plans, ie. idiotic questions
• assuming your draft plans are ‘perfect’

d) Take as long as you need to get to know investors who show real interest (see point #3). This is a marriage you cannot get out of.

Most common mistakes:

• being lured by ‘dumb-money’
• rushing to closing
• ignoring warning signs about bad chemistry

e) Close the Seed round and stop focusing on capital.

Most common mistakes:

• remaining in ‘fund-raising’ mode and focusing away from the business
• accepting sloppy terms in the Seed round
• taking too long to close once the right investors have been identified

If you’ve done this right you will have gained a valuable business partner for your startup, and that’s a useful thing.

Raising toddlers is a lot of hard work.

Want answers about your startup venture while donating to a worthwhile cause? I’m happy to help.