A Very Simplified + Formulaic Way To Raise Your Seed Round

For this post, I’m assuming you have a prototype or early-version of your product with some semblance of traction, a strong founding team (not missing any key roles), have a multi-billion dollar market you are attacking, have a basic vision of where you are going, and are beginning to talk to investors about your seed round.

If you are looking to raise a seed round there is a very simplified and formulaic way of going about it. Fundraising is somewhat of a game, and to do it you need to learn how to play. The best way to learn is from someone that has done it before. I learned it from a few friends who had done it before. The most effective ones were friends that went to YC. They knew the game cold.

This post is not intended to make any founder or investor upset that I’m revealing anything secretive. You still need to have a killer team, product, traction, big market, etc. If you don’t have a combination of those things, there is NOTHING anyone can do to help you besides telling you to get those things in order.

But if you do have those things in place, here is how you raise your seed round:

Step #0: Begin talking to investors by using every single connection you have to get in front of them.

But remember, the best intros come from founders who have raised money from that investor or an investor who is already in and connects you to another investor friend they think will add value. If you get an intro from a founder that the person didn’t invest in or through an investor that is not participating, it is, 8 out of 10 times, taken as a negative signal. There are obviously exceptions, like the founder that intros is real friends with the investor or the investor intro’ing to another investor is focused on a different industry. But try to get the warm intro from the best sources.

Step #1: Finding a lead investor

You are talking to investors, but don’t ask them for money yet. Tell them what you are working on, why you think it is going to be big, and what the next few months look like getting on the road forward. Some investors hate when founders don’t ask for money but it is important not to early on UNTIL you find the lead investor. You have to ask around and do your research to figure out which funds lead seed rounds. Make a list of those funds and when going into those meetings make sure to bring up that you are looking for a lead investor (and ask them if they are interested — i.e. asking for money). Finding a lead investor is crucial to making the process of raising faster. The lead investor typically puts 40–60% of the money into the round (i.e. $400k-$600k in a $1M round and $750-$1.2M in $2M round).

Before finding the lead I would make sure to have the general terms you are looking for in mind. Typically if this is your first rodeo, going for between $1–2M seed round and keeping the post money valuation staying between $5–7.5M should be pretty vanilla. If you try to give away less than 20% of your company at the seed round (while raising over $1M), you will need to have something really popping in terms of traction to defend that reasoning.

Step #2: Closing in 45–60 days

Once you find the lead investor and set the terms it is time to go back to everyone you have previously spoken with (and liked) and tell them, a) you have a lead (and who it is), b) you have terms (and what they are), c) you are closing the round in either 45 or 60 days, and d) you are happy to sit down again and talk more about the business. You do this follow up with everyone (and you hopefully followed up after your first meeting and told them you would keep them posted). By giving a strong date on the close it gets people moving.

I would also recommend having your lead investor introduce you to all the angels or funds they like that typically participate with $25–250k checks.

One helpful thing to do during these 45–60 days is to have news come out about your company. This could mean a new product being released, announcing your company for the first time, etc. Basically a little public push will go a long way. It may or may not get you a bundle of users but if in the right publication at the right time it could push a potential investor to feel like they will miss out if they don’t participate. Not 100% needed but can definitely help. If done right, I’ve seen it work wonders.

Step #3: Actually Close

To do this, you need to be okay with people passing. Rejection happens a lot when fundraising. A lot a lot. Some of the most well known investors passed on Uber’s seed round. It happens. No investor will make your business. If you need any one investor to make your business, you are in big trouble. You and your team will make your business happen. Investors really want startups that don’t need their help but are willing to take their money to go faster.

I’m not saying investors don’t help. They do. They just want businesses that will be successful with or without them.

So with actually closing the round, when you give the 45–60 day close, you stick to it. Some people will pass, some people will want to do it but are in the middle of funds and can’t deploy capital. There will be a million reasons why people pass. But as long as you have the lead and a bunch of people who want to participate, you’ll be fine.

Step #4: Keep a little open

It isn’t widely known but most startups keep a little of their round open even when they’ve publicly announced their funding. I didn’t know this until we did our seed round and some investors told us. It is typically under $200k left open for people who missed the seed round or were on the fence and once the round was announced got their act together. We, at SocialRank, announced our $1M seed round in May ’14 and left $150k open and finished it off after a week or two. The people who came in were some people who hadn’t know we were raising and a few people who were just taking a little longer than others. The announcement blog post, and coverage on TechCrunch, VentureBeat, etc. accelerated the last $150k.

Remember if you raise a “priced round” (as opposed to a convertible note, which I don’t recommend if you do more than $1M) the information becomes public through Form D. So you typically want to control the news coming out and announce before a reporter finds it and writes whatever they feel like about the funding.

That’s really it.

So to recap: you first need a team, product, traction, big market. Then start working on getting intros and meeting investors, tell them what you are up to, why you are excited, and where it is going. The goal is to find a lead investor in this process and once you do go back to everyone saying you are closing within 60 days. Try to release something in this time frame and get some press to help increase investor interest. You’ll lose people in this process in general and that’s okay as long as you are confident you’ll get enough people to participate. Keep some of the round open so people can jump in once the news comes out. Good luck and have fun!

Now comes the hard part, building a business.

Published in #SWLH (Startups, Wanderlust, and Life Hacking)