A seed round manual for founders: strategies, pitch prep, valuation, traps, tips and more.

Matilde Giglio
Aug 16, 2019 · 11 min read

VCs invest in less than 1% of the companies they meet. Here’s a manual to help you beat the odds.

Seed investments today look more like the Series A rounds of a few years ago. Given this recent shift in the fundraising environment, many founders are wondering: what does it take to run a successful seed round?

As a Principal at Hambro Perks VC and mentor for Startup Bootcamp, I’ve spent a lot of time this summer advising startups on fundraising. This week, I presented a course for Agora on ‘how to fundraise’ for pre-seed and seed rounds (video here). With this blog, I’m turning all these conversations into a short guide to raising seed capital.

As the co-founder of Compass News, a machine learning journalism startup, we raised over $1.5m in pre-seed and seed rounds from UK and US VCs. My fundraising process was not that great, but somehow we got it done.

What follows is a manual to pre-seed and seed fundraising and some tips and tricks I’ve learned along the way.

The good and the bad news

If you are about to start a company or preparing for your fundraise, the good news is that today’s the best time to be a founder. There are more investors, VC firms and more capital than ever before.

The bad news is that fundraising isn’t easy. It’s absolutely brutal, time-consuming and draining. It’s a big sales job.

Some meetings will go exceptionally well, others will be super frustrating, and the rest will make you want to doubt your idea, choice of career, and possibly existence on this planet.

Should you raise venture capital for your startup?

Let’s start with the decision to raise money in the first place and in particular, the decision to raise from VCs. You need to determine whether your company is appropriate for venture capital.

Bootstrapping vs fundraising:

A question you’ll hear investors frequently ask is:

“Is this a venture scale business?”

Many businesses don’t require fundraising or venture financing. E.g. the so called ‘lifestyle businesses’.

VCs want 20, 30, 40x their investment. So you need to convince your VC (and yourself!) that the market opportunity for your business is sufficiently large to be able to generate a profitable, high-growth, several-hundred-million-dollar-revenue business over a seven-to-ten-year period.

Can your business make $100m in revenue in the next 6–8 years?

The VC mindset:

The secret rule of thumb that most VCs have: any single investment needs to be able to return the entire fund (just look at the size of their fund to figure out what this means for different firms).

In other words, depending on the VC’s ultimate ownership level of your company, the returns to the VC on the investment should be meaningful enough to move the needle on the fund’s overall economics.

Note: There are smaller VC funds (often with less than $80 million fund sizes) that do invest very early in companies and for which the business model is to exit companies through acquisitions at lower ultimate end valuations. Some angels might follow a similar strategy. But remember that this is the exception, not the rule.

Should you raise from angels or venture capitalists?

It depends on how much you want to raise. If you are raising less than $500k probably angels are well suited as they write smaller cheques.

👍Plus about angels: their process is faster, they don’t have a team and are responsible only for themselves (not their limited partners).

👍 Plus about VCs: normally are more helpful in other ways. Generally angels have a full time job, so have less time to help.

How much money should you raise?

Now, let’s assume you have decided that you want to raise from VCs. How much should you raise and at which valuation? The answer to these questions seems obvious — raise as much money as you possibly can at the highest possible valuation.

The reality is more complex.

Trap to avoid: You shouldn’t lock yourself into a valuation and a preferred money stack you can’t realistically exceed. It’ll hurt you in the long-run. Don’t use valuations as a personal measurement of success.

Seed range from a few hundreds of thousands dollars to $2m- $3m. How much you raise will depend on multiple factors:

  • Team: founders’ experience and track record (second time founders who had an exit will have an easier time fundraising) domain expertise etc
  • Product: how unique is your product and tech, stage of development?
  • Market: revenue potential, TAM

One way to think about how much to raise is to decide how many months of operation you want to fund and how much money you’ll need to spend to grow your product (marketing and sales).

General rule: Your goal when fundraising should be to raise as much money as needed to get to your next “fundable” milestone, which will usually be 12 to 18 months later.

What will you need to demonstrate for your next round to show you have de-risked the business so that investors will be willing to put new money into the business at an increased price and valuation?

Takeaway: Think about your next round of financing when you are raising the current round of financing.

👉 Tip 1: Investors want to back growth. Investors hate it when someone says “I’m raising for 18 months of runaway”. They don’t want you to just survive. They want you to hit milestones and progress.

E.g. Product development is not growth in an investor’s mind. What’s the outcome of that? You will be spending money on product, but what will that allow you to achieve in terms of growth and/or revenue?

👉Tip 2: Create multiple fundraising plans. The fact is, you won’t know how much you’ll end up raising until you close your round. What if you raise more or what if you raise less than you planned? It’s important to have different plans. For each plan you need to know what type of milestones you can hit.

When to raise money

Usually, when you can raise money, you should.

For some founders with reputation, is enough to have a compelling story (huge market and team that can execute).

For the rest of us, you need to have a first version of the product and some traction. Luckily today it is not too expensive to build a software product.

You also need to have figured out the market opportunity, who your users are and if your users like your product: do you have early signs of product-market fit? Is your product getting fast adoption?

What do you mean by fast? It depends on your stage.

What round are you raising? Pre-Seed, Seed, Post-Seed

Seed can be divided up into three stages. Taking inspiration from Elizabeth Yin talk, here are some of the key differences.

Let’s focus on the first two:

Pre-seed: For startups to raise a pre-seed round you should have assembled a solid founding team. You need to have a clear direction and understanding of the problem you are solving. You need to have built a V1 of a product at a minimum. Not having built something is a warning sign to investors, because the cost of creating software is now so low. In some cases you should have done some level of customer validation.

Seed: At this stage, investors are typically looking for 15% to 20%+ MoM growth. And at this stage, you have a solid product and are starting to form a growth story. You should speak to investors when you have some positive momentum. You need to be shipping fast, getting new customers, leads, making new top hires, getting media attention.

Take away: Know your stage, who to pitch and the seed funding ecosystem.

Money comes with some tradeoffs: dilution and control

Pre-revenue valuation is more art than science because all investments are based on potential, not results.

Why do some companies seem to be worth $30m and some $2m? Because investors were convinced that was what they were (or will be in the near future) worth. It is that simple.

In general:

The earlier you are, the higher the risk, the lower the valuation, the smaller the raise.

Valuation is a measure of all the risks that have not been eliminated (team, tech, production, go to market etc).

The objective is to find a valuation with which you are comfortable, that will allow you to raise the amount you need to achieve your goals with acceptable dilution, and that investors will find reasonable and attractive enough to write you a check.

👉Tip: unless you’ve signed a term sheet, don’t put a valuation in your pitch deck. You’re just guessing, and if you guess too high you will turn off price sensitive investors, while guessing too low means you are over-diluting yourself. Let the market price your round.

Takeaway: When asked, just say “the market will decide”. Ultimately, your lead investor will set terms and your valuation.

How to get VC ready

When you fundraise, you will need to talk to a lot of investors and VCs. VCs get thousands to tens of thousands of pitches every year. They meet hundreds to thousands of founders. They investigate less than 5% of deals and invest in less than 1%.

This means that it will take about 100 meetings to close your early-stage rounds of financing.

1) Develop your list of target investors

VCs are not created equal and you really want to target and talk to the ones who are right for you

When we raised for Compass, we had a target list of over 80 investors. You should probably aim for 100+.

Research potential investors to determine which firms and partner might be the best fit for your round. Filter by your stage, industry and geography. Search Crunchbase, AngelList or CB insights, look at their portfolio. Social media and blog post can provide valuable insights into various firms’ strategies and partners’ personalities.

Are they interested in your space? Good, but make sure they have not invested in your competitor!

I suggest you leverage technologies to help you streamline your effort. For example, Airtable allows you to create information stores tracking essential bits of information such as: investor name, details, last point of contact, status.

When you are done, label your top-choice, second-choice and lower-choice investors, that way you can be strategic with your outreach and better manage your time.

2) Network

Leverage your network, in particular with founders these investors backed, your own investors and angels to get warm introductions. From my experience, cold email will dramatically reduce your chances.

You want to find the best referrer from within your network — the one who will provide you the most influential reference to the investors you seek.

When you ask for an introduction, do your work. Clearly state how your company specifically fits with the investor thesis.

3) Pack in meetings in a few weeks

Once that’s done, pack in meetings in a few weeks and set a time limit for your fundraise. A good time limit for a seed deal (in my opinion) is 2–4 weeks (this is excluding the upfront time you spend in researching investors, getting intros, and setting up meetings).

👉Tip: Sequence your meeting appropriately Start with angels and less promising firms, and then moving up the ladder from there. Use each meeting to improve your game for the next one.

👉Tip: Creating FOMO Packing meetings over a short period of time will allow you to create an artificial level of FOMO. You will be in a position to say, for example: “I’m talking to 10 firms this week, I don’t know when my round is going to close but I’m doing a lot of investment meetings”.

Keep in mind that getting meetings on the calendar towards the end of August or December might be difficult due to travel or vacation schedules.

Always focus on lead investors first — those who will set terms and help you close the round calling other VC-friends.

4) The pitch deck

Your deck, should not tell your story or your business’ story. You should. Don’t put too much content in it and keep time for questions.

Your pitch deck should answer these questions:

  • What (are you building/vision)?
  • How (what’s your secret sauce?)
  • Who are you? (at the early stage founders are 60/70% of the decision making)
  • Why now (new trends that makes this compelling now?)
  • Against who? (competition)
  • Market? (how big can this become)
  • For whom?
  • Sell how?
  • How much? (are you raising)
  • What for? (what milestones do you want to achieve)
  • Demos (normally important for consumer tech)

Extra Tips and traps

👋 If a VC is interested, they will follow up within 24 hours from your meeting asking for more information, or to meet again. If they don’t, they are just taking time. There is no real incentive for a VC to say no. For them, is better to wait and see. This is very annoying, but it is how it works. Don’t waste your time hoping and praying on the ones that aren’t. Just move on.

🦊 VC can smell BS from a mile away: don’t make graphs look exponential with 6 months of data. Stop using hyperbole about your market. You’re pitching to smart people with a lot of experience.

❌ Sometimes an investor who hasn’t invested will offer to introduce you to another investor. Don’t take it! It’s a trap. The signal you are then sending to the new investors is that you were not worth investing in.

🤕 Always know there is a dark day. So on a personal level, are they the right partner? Look beyond a VC’s brand name. Plenty of no-name firms have backed big successes, and plenty of famous firms have invested in crappy companies. What matters is the person who you will be dealing with on a day-to-day basis.

👑Traction trumps everything: I put this one last because velocity + traction overcome a host of other questions about a business.

Finally, good luck 😍. It’s normal to be scared, but you got this!

As a startup founder that has raised money, you will always remember the first investor who said “yes”. Thank you to Hambro Perks, Bloomberg Beta, Matter VC and the rest of our backers who believed in our vision when it was just a slide deck.

Have you developed other best practices for approaching seed fundraising? Did I leave anything? Share your views in the comments or tweet me @Matildegiglio

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Matilde Giglio

Written by

I built Compass News, I ran digital for the Congress Party (2019 Indian general election), I now invest in early-stage tech entrepreneurs.

The Startup

Get smarter at building your thing. Follow to join The Startup’s +8 million monthly readers & +724K followers.

Matilde Giglio

Written by

I built Compass News, I ran digital for the Congress Party (2019 Indian general election), I now invest in early-stage tech entrepreneurs.

The Startup

Get smarter at building your thing. Follow to join The Startup’s +8 million monthly readers & +724K followers.

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