Raising Seed Capital? Here’s My Guide on How To Do It Successfully

Parul Singh
Sep 25, 2018 · 8 min read

6 important questions every entrepreneur should answer to prepare for your pitch, whether you’re pre-product, or bootstrapped and profitable.

How do you find the right investors for your startup?

If you’re an entrepreneur, you probably have asked yourself this question more than once.

In fact, that’s the #1 question entrepreneurs ask me. I’m an investor at Founder Collective, a seed-stage VC fund that has backed hundreds of startups over the last 9 years — including Buzzfeed, the Trade Desk, Pillpack, and Uber.

The answer is not as straightforward as it seems. I have seen first-hand how seed funding for startups has rapidly evolved in just a few years’ time. Consider the following macro changes:

As the overall tech industry is maturing, capital is more plentiful (but paradoxically competitive), the cost of technology is constantly dropping, and code is being increasingly commodified. This leads to more companies being built faster and for less. The culmination of all this? A lot less white space, and more serial entrepreneurs competing for seed funding.

With this in mind, what do you, as a founder, need to know to ace your increasingly competitive seed round raise? Here are 6 questions you should ask yourself to prepare:

1. Realistically, are you venture scale?

  • 10x return: As my colleague David Frankel writes if you can’t turn $1 into $10, why should investors believe you can turn $1M into $10M? To build a venture fundable business, you need to create a value of this scale (or more.)
  • Velocity: How fast can you grow? There is a tremendous difference between getting to $1M annual revenue in 6 months or 6 years. This matters for two reasons: 1) Investors will extrapolate your future growth rate from your past performance 2) When you’re raising venture money, you’re building with someone else’s money and there is an often unacknowledged cost to that — namely your ownership and ultimately the funders’ returns.
  • Product < Business < Asset: VCs are searching for high velocity, high return investments. Startups with clear long-term assets are more valuable, which could be a database of genetic information that’s 20X broader than any competitor, or market share in an industry where there is 15+ year lock-in. At the bare minimum, make sure you are building a business, not a product. (If your go-to-market plan is to leave this to the salespeople you plan to hire at some future point, this ultimately will not work — certainly not for venture scale.)

Bottom line is if you are not venture scale, but you’re raising money — or spending — like you are, you have a problem.

2. How competitive are you?

  • Cohort effect: When you start raising money, whether you realize it or not, you automatically become part of a peer group, other companies that have raised as much as you have, or to a lesser extent have comparable metrics (revenue, traction/adoption.) If you are way behind in your peer group, you won’t stand out in a weekly VC partner meeting, all else being equal. You could still come out ahead, but your team, market, and defensibility will have to be that much more impressive.
    That’s why I generally advise founders to determine what to call their round based on traction, and use the earliest label which can apply. Be within a cohort where you can compete effectively: it’s the adult version of red-shirting for sports teams.
  • Winners take all: Assuming that your startup is successful and that you’re tackling a valuable market opportunity, 2–4 direct, formidable competitors will likely arise in your space. Most founders don’t look this far ahead, but by then you’re either at the front of the pack, or not — and in the latter case you will lose out on investor money.
    Because of the winner-takes-all effect of technology (where the bulk of value accrues to the market leader), few VCs will rationally put money into the #3 or #4 competitor in a space. And, that’s why we evaluate competitiveness from our first meeting, because who wants to put 4–6 years into a business to run into a brick wall down the road? Neither the founders nor us. You simply don’t get to be the #1 or #2 in your space without planning and executing on that plan from day 0 (Jeff Bezos’ day 1 letter here for emphasis — Amazon is a fierce competitor, one of the best of our era).
  • Sector bias: Don’t get discouraged just because you are in a less competitive funding sector. While many funds are generalists, the reality is that they will typically focus on the most profitable sectors, and sectors with structural risks, like health care or education, may be tougher to close investment. This is also a good reason that sector-focused funds are becoming a lot more common. You should take advantage both of them and of strategic angels in your sector, who can crucially help you navigate hard-to-open sales doors with their industry connections.

3. Are you right-sizing your fundraising based on fund dynamics?

On the other end of the spectrum, angel investors can have a fantastic outcome with a $50M run rate company, and consequently may be willing to take risks much earlier. Don’t waste your early fundraising cycles if there isn’t a fit, especially not in pursuit of a brand name for your term sheet.

4. Where are you on the seed gradient?

(Two quick notes: We defined a category we call seed plus for between-stage companies who are not quite ready for a competitive A, but have significant traction and may have passed a growth inflection point. Also, these buckets apply to less capital-intensive businesses like software, rather than hardware or deep tech.)

5. Do you have a startup Olympian mindset?

In entrepreneurship, my colleague Eric Paley calls it truth-seeking: Can you face the facts about your business without getting defensive or going into denial? Can you grapple with hard realities and find solutions?

If an investor does not move forward, please don’t take it personally, or see it as a fatal blow aimed at the business you’re building. Ask for feedback, learn from it, and look for investors who are excited about your business.

6. Are you willing to optimize for investor fit?

How do you prevent this? Make sure that you and your investors match up on:

  • Go-to-market strategy
  • Product principles and prioritization
  • How involved you want them to be
  • How they handle it when things don’t go well

Also, speak with other entrepreneurs in their portfolio, which will help you answer the key criteria I mentioned. Reference checking is a two-way street! Finally, remember not to ignore your gut. With team members and investors, ask yourself this one question, “Who am I most excited about collaborating with?”

Winning as a startup founder is about building something amazing, but it’s also about building relationships, supporting your team, and having fun on the journey. As you gear up for your seed round, make time to reflect and refocus.

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Here are a few other excellent articles on raising a seed round:

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If you found this useful, I just wrote a checklist for raising seed funding which you may also like.

Good luck building! If you’d like to get notified about my next blog post, please add your name to my brand new email list.

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