If you already have a functional prototype and a business plan and you've burned through much of your initial money, then you’re ready to start raising real capital for your startup.
There are several natural questions entrepreneurs have at this point:
We previously explored when to hire your first employee (and who to hire) as you start to think about getting help when you have a getting your great idea off the ground.
Let’s fast forward a bit and assume you're firing on all cylinders having made it this far:
You raised some initial money and maybe have a small team developing your prototype, which is hopefully working to some degree. Your business plan is taking shape, and you have a pretty decent understanding of the market you are pursuing.
When is it time to get serious and raise seed money for your startup? Now!
What is seed money?
Seed money, also referred to as seed capital or seed funding, is a private investment of capital in a startup in exchange for equity. Seed money is typically in the tens to hundreds of thousands of dollars range, not millions. This range exists because venture capital firms typically won’t invest less than $1 million, so this is often the maximum you can expect from seed investors.
Venture capital has some key differences from seed capital, and one of the primary differentiating factors is the amount of money these groups invest in early-stage startups.
While venture capital rounds can reach hundreds of millions of dollars, startups raise far less in seed rounds. The purpose of a seed round is to keep the business afloat until it can independently generate cash flow, demonstrate its value, and raise additional capital.
Another difference? Venture capital investments most often come from institutions or funds while seed capital is more likely to come from individual investors, such as angel investors, or groups of angel investors.
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How do you find seed capital?
To find seed capital you need to find angel investors. There are likely local groups of these investors in your region or city. You can also look for startup incubators or accelerators, which are groups that might also provide some office space and access to other entrepreneur resources.
Since angel investors will typically reject 75% (or more) of the investment proposals they receive, you want to have your act together before you approach them.
These investors not only have money, but they often have plenty of experience as well, so if you are able to acquire funding from an angel investor, you’ll instantly improve your chances of success. You better believe investors are going to do everything in their power to get a return on their investment, and they wouldn’t have made the investment in the first place if they didn’t think they could.
Raising seed capital from angels not only gives you money to help you get to the next stage of growth, but it also validates your efforts and ideas — confirmation that what you’ve built so far has the potential to be successful!
So, how do you approach an angel investor to raise money? To answer that, it helps to understand what a “seed round” really is.
What is a seed round?
A seed round is typically a first and relatively small round of startup funding that allows you and your founding team to execute and prove your concept or idea works. Commonly described as "finding product-market fit," seed funding is what helps founders prove there's strong market demand for their product or solution.
RELATED: How to Establish Product-Market Fit
A friends and family round or funding from other initial money sources usually provide you with capital in the tens-of-thousands of dollars range, which is just enough to get your business started.
Seed capital, on the other hand, can be enough to bring your product to fruition so you can raise venture capital, like a Series A round — it's rarely enough money to get you all the way to market, though. Most often, a seed round will result in investments that are more than a friends and family round but less than a venture capital round.
Seed money can also be pretty expensive in terms of the equity you have to give up in order to get it, so don’t raise more than you think you need to get to Series A. Also, be very frugal in how you spend it.
How to get startup seed funding
It's not always clear when the time is right to raise a seed round, but conventional wisdom says you should approach seed investors when you believe you have what it takes to build a company that can establish product-market, which in turn will enable you to raise a series A or a solid return for your early investors.
Here are the top 3 things to show investors when raising seed capital:
A solid business plan for your product
A simple, engaging pitch presentation
A committed team capable of success
Follow the detailed steps below to prepare everything you'll need to raise seed money for your startup.
1. Develop a business plan
You may or may not have a functional prototype at this point, but you should have a business plan of some sort before approaching investors. Why? Because you need to have some idea of who will want your product, how big the market is, and how much capital you need to reach your next major milestone. Without a business plan, your odds of raising seed money are pretty slim.
If you don‘t have a written business plan, it's time to create one. Don't be afraid to ask a professional to help you develop a thorough yet concise plan and presentation for your startup. This could be a friend or colleague with an MBA or with extensive business or marketing leadership experience.
Show investors that you've done your research and that you're not throwing darts while blindfolded.
You don’t really have to be right about all this, and you probably won't be, but you'll need to persuade your potential investor about your business' potential — in other words, you need to show why you are doing this and why they'll want to support your journey.
Why having a solid business plan can help win early investors
The reason investors are even talking to you is that your product idea and the market you are pursuing are appealing to them. If all you have is an idea and a small team — but no business plan — it is still possible to raise money, but the amount of equity you will be giving up is commensurate with the risk the investors think they will be taking.
Investors want to see that you and your team can adjust and adapt to changing markets and you can confront engineering challenges that could make or break your business.
Creating a business plan, even at the most basic level, makes you think about what you are trying to do and what it will take to get there. With that you can demonstrate that you've really thought through the road ahead, which will make investors feel confident and excited about getting behind a compelling product (yours) and into a market that interests them.
While a venture firm might require a detailed analysis of the market and several years of projected revenue and costs, a typical angel investor won't need that level of detail.
2. Prepare your pitch presentation
There are a lot of generic ‘rules’ about giving a pitch (or any presentation for that matter). They apply here.
The worst thing you can do is have a bunch of slides with words in small font that you stand in front of and read verbatim — don’t laugh, it happens all the time! Don’t go to the other extreme either and have a ton of cute graphics and animation that distracts your audience.
You should be able to present your pitch in 20 minutes with about 10 easy-to-digest slides that help bring your story to life. Be engaging, a little fun, and very professional.
Keep it simple
With angel investors you want to keep your pitch really simple. Why? Because for every potential angel investor in the room, there’s another investor not there. You need to avoid the dreaded “You’re going to invest in what?!” question that your potential angel can’t answer in 10 simple words or less. “It’s a particle transformation process that sequences binary proteins in a logical sequence” is far less understandable than a simple explanation of whatever that is that I just said. And no, I have no idea what that is.
Let your personality shine
Venture capital firms invest in ideas and teams, while angel investors invest more in personalities and ideas. When pitching to a potential angel investor or a group of angel investors you want to work really hard on being personable, friendly and engaged. This doesn’t mean you want to be a standup comic while presenting, but angel investors are looking at you much more personally than a typical venture investor will.
3. Draft your seed team
The question at hand is really about what potential seed investors expect to see in a team before committing to investing. Everyone has different ideas about this.
Some experts believe that you should have a stellar executive team. Others believe that having a Board of Advisors made up of big names is required. There are probably cases where one or both of these are true, but there are often more important factors that should be prioritized first.
A Board of Advisors at this point has little value for raising money, and a stellar executive team, or even any executive team, is not really adding any value either.
A really good marketing person, however, can put together a more formal business plan that contains the essentials you need to raise money from serious angel investors. They can figure out the target market, market size and describe the customers you seek. They should also serve as a Product Manager, having long conversations with your engineering team about what’s possible and how long things might take to get to a shipping product.
Putting the numbers together may require outside help, but with that being said, it’s probably not worth the cost to actually hire a money person yet. Investors seem to understand a few things at this stage. Their understandings translate to specific things you should be prepared to present.
If your potential investors can see some reality and not just arm-waving, some risk is mitigated in their eyes. Money is very expensive at this stage in regard to the amount of equity you will give up for it.
Investors will need to see that the team is committed to doing what it takes to get to the next stage. They want full-time passionate people who can all articulate the concept and clearly believe in it.
Full-time people. Please do not go out and try to raise money with a team that will join full-time when it makes sense or whatever justification they might have for not already being fully committed. While it isn’t impossible to do, it’s just less likely.
Why team commitment is so important to seed investors
If you have working code and a business plan, investors are going to be much more focused on the team. They will want to know that you and your team can succeed.
At this point, you should have someone on your team who can go deep on the market and address issues like defining the correct feature set for the product, finding customers and accurately sizing the market. You should also have someone who is clear and articulate on the engineering issues, development risks, schedules and feature requirements. This is probably you.
Experienced entrepreneurs recommend finding and hiring a great marketing person who knows the market you are pursuing at this stage.
How much should you pay your first marketing hire?
What you pay a great marketing person certainly depends on market conditions but pay what you need to pay to get the right person. This can be very tough at this stage.
You are raising your first seed round of capital, so you don’t yet have a lot of money to pay salaries. It’s the same with the engineering lead, although it’s possible that you or one of your seasoned developers can take this role. The equity component of this compensation package is a bigger question.
A VP-level marketer who is not a founding partner, and who is coming in after you have raised money can probably expect 2% to 3% equity. If your marketing person is not a VP-level candidate but is taking career risks working with you full-time at this early stage, then 2% to 4% is fair and may allow you to pay them a bit less than market rates.
Don’t go overboard on the equity, though; you are going to need it later. Of course, these are guidelines, not rules and everyone you ask will have a different opinion.
Once you have an idea of who you need to hire and how you'll need to compensate them, you'll be one step closer to raising seed capital. At this point, you should have a clearer picture of how much money you need to raise!
What your startup team should and shouldn't look like pre-seed
You don't need a salesperson at this point; salespeople get into sales mode in investor presentations and take the whole conversation off the tracks.
Your team at this point does not need to be made up entirely of VP-level people; managing and leadership are very different skills compared to specific competence in markets or technology.
Your team should be small enough to not need heavy-weight leadership, if you are raising a seed round of capital.
You may also want a numbers person who can walk through the financial picture in the business plan, although having credible numbers, forecasts, and a deep understanding of the market you are looking at are often enough at this stage. Most entrepreneurs can learn enough to be dangerous and accomplish what's required here until it's time to make a key financial hire.
Find the right funding strategy for your startup
Most entrepreneurs see venture capital as the holy grail of funding solutions, but fewer than 0.05% of U.S. startups ever raise a VC round.
There are other startup fundraising options, and some of them might be more advantageous for your business. This guide will help you decide what kind of capital to raise, when to raise it, and what you need to get it.