How to Raise a Seed Round
Being an entrepreneur and angel investor himself, Summer Venture Program director David Chang has seen both sides of the fundraising process. As part of “fundraising week” at SVP, David hosted a session for participants covering the basics of fundraising and tactics.
David started the session by sharing the different sources of capital. The ones we hear most about are:
- Venture Capital
- Angel Groups
- Friends and Family
The ones that we hear less about include:
- SBA Loans and Personal Debt
- Corporate Venture
- Vendors or Equipment Finance
- Bootstrapping (creatively)
Depending on where the venture is going, there are certain sources of capital that may be a better fit than others. For example, if you are a growth oriented business, crowdfunding and a personal raise may be a better source of capital. Another example is if you are a high growth scalable business; venture capital may be the route to pursue.
Before raising a round, David suggested to keep three key areas in mind:
- How much money you are raising: put together a basic financial model of cost drivers and revenue streams and a monthly forecast for the next two years. Investors are looking at what the drivers are and want to make sure you understand what they are too. The fundraising rule of thumb is to try to get 12-18 months’ cash.
- What you will use the money for: what does your venture need capital for? Building out the product? Growing the team? Customer acquisition? Put some thought on where the capital will go towards.
- Milestones that you can accomplish from the round: once you get the funds, what milestones will you set forth for yourself and the venture? As you continue to make progress, you are adding to your venture. This value will continue to increase.
When you are ready to raise your round, David shared five steps to get you through the process:
- Prep: have the basics of your startups in check. Make sure you are legally formed, have your documents ready such as your founders agreement, know your financials and put together your deck/exec summary in advance.
- Target: have a target list of investors that you want to reach out. There are different criteria to consider when putting together this list, including location and industry.
- Socialize: this is the step that is most often overlooked. Go out there, get warm quality connections, get to know the investors. This step takes time, sometimes months, but it will open more doors and opportunities. During this socialization phase, don’t say you are looking to raise money. The reason is because it starts the clock and you might not be ready to focus your energy on fundraising. During this socialization period is when you will also be refining your pitch. You’ll likely receive a lot of feedback, but make you act within reason. You don’t have to change your pitch every time someone you meet gives you feedback, act on common themes and from trusted advisors.
- Raise: once you are ready to start raising your round, you can decide if you want to have one lead or if you want to play investors off each other. Approach your top candidates at the same time and run conversations in parallel. Create a sense of urgency as now the clock has started; finding that first investor is key. Structure, equity (i.e. preferred stock) vs. debt (i.e. convertible notes, SAFEs), is also something to consider when you are raising your round.
- Close: valuation and dilution and two important things to think about. Valuation, in the early days, may not be a huge factor in what your end share will be. David suggested www.ownyourventure.com as a resource to play with different scenarios.
Understanding the basics of raising money is important before jumping into full fundraising mode. Keep these tactics in mind when you are ready to raise your seed round. Remember, the deal is not closed until the money is in the bank.