Starting a new business creates a lengthy list of decisions for you to settle. One of these choices is whether or not to raise a seed round for funding, and, if so, when and how to do that. If you’re excited to push your startup idea along but need external financial support, a seed round raise might be the logical next step. Before you proceed with a raise, consider your goals and how to accomplish them.
What is a seed round raise?
A seed round is your first time soliciting investors to fund your startup. This round is intended to provide capital to get your new business off the ground. The commonly referenced metaphor for raising your seed round is that the money you bring in is the water used to sprout your seed (startup) so it can grow into a tree (profitable business). The seed round funds might, for example, support initial market research and product development. New businesses also need to cover everyday costs, such as overhead and any payroll, in addition to those initial product development costs.
Some startups bootstrap their way through this phase of development rather than raising a seed round. Bootstrapping is self-funding your startup until you are ready for a Series A raise, which is intended to help fuel more extensive growth for a startup that is already established. However, without a substantial savings account that you’re able to pour into your venture, bootstrapping is unlikely to provide sufficient funds for a fresh startup. Therefore, a seed round raise is fairly common. (You can learn more about bootstrapping here.)
What are the pros and cons of a seed round raise?
Raising money early comes with obvious benefits, but bringing in investors at an early stage also presents potential drawbacks. Think through how a seed round will affect your business and growth process before you start pitching to investors.
Clearly the primary benefit of a seed round raise is bringing in money to fuel your business. A general rule of thumb when setting a raise goal is to look at your costs per month and multiply by 12 to 18 months. Some research pushes this commonly shared advice further and indicates that you should aim for 18 to 21 months of funding.
If you successfully raise this amount, you’ll be well-positioned to focus on your product development for the next year or so, barring any unforeseen circumstances. The longer your runway, or amount of time that your startup is funded for, the better chance you have at successfully moving your business toward profitability, or at least the next stage of development (and another raise).
Typically, you’ll need to be profitable or start your next raise when you have three to six months of runway left. According to CB Insights, the second leading reason for a startup failure is that it ran out of cash. Plan ahead to get your next raise started with sufficient time to avoid this common pitfall.
Another benefit of raising a seed round is the possibility of partnering with investors who can contribute their expertise to your startup’s development process. Depending who you are able to bring in as an investor, you may gain a mentor to shepherd you through your new venture. Expert guidance can be extremely valuable to a startup founder, especially if this is your first time launching a business
Raising a seed round also presents potential drawbacks. Depending how you structure your raise, you may be giving up more equity and control early on than would be ideal. Consider how much influence your investors will have and whether that fits your vision for your startup.
Additionally, time is a precious resource, and when you’re focused on raising your seed round, you’re not able to focus on your actual product development, marketing, etc. Your goal is to raise money quickly, then re-focus on running your new business. Avoid letting your raise become a drawn-out affair that distracts you from product development.
What do you need to start a seed round raise?
Before you eagerly jump into a seed round raise, assess whether your startup is ready for investors and prepare your pitch information.
Minimum Viable Product (MVP)
In order to pitch your startup to investors, you need to actually have something to pitch. You don’t necessarily have to have it all figured out before you start your seed round, as the goal of your seed round raise might be to fuel market research and similar developmental tasks. Opinions vary on whether you need simply a compelling idea or an actual MVP, but you do need something compelling enough to attract investors.
A minimum viable product is the basic production of your idea. The MVP is somewhere between a prototype and final product, but it is developed enough to be viably used for initial market testing. Creating your MVP before pitching to investors will typically give you a better chance at attracting investor interest. (Learn more about MVPs here.)
Some investors may support a startup based on an amazing idea and story, but most want to see an MVP and some traction with customers.
In addition to having developed a product worthy of pitching, you need to prepare a financial plan and a pitch deck. Your financial plan should include enough information to assure your potential investors that you understand the financial component of your business and your product’s industry and market. What this plan specifically includes can vary, but be prepared to discuss the facts and assumptions you used to determine your numbers.
A pitch deck is the tool you use to concisely present your startup in a compelling manner. Your pitch content should include your team, the market gap, your solution and product roadmap, and your business model and competitive landscape. Keep your content succinct, and clearly demonstrate how your product fills a hole in the existing market. (Read tips for a successful pitch deck here.)
Are you ready?
Raising a seed round can take significant time and effort, but it also offers the potential reward of the funds needed to move your startup to the next level.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.