Notes on raising seed financing

Last night I taught a class via Skillshare (disclosure: Founder Collective is an investor) about how to raise a seed round.  After a long day I wasn’t particularly looking forward to it, but it turned out to be a lot of fun and I stayed well past the scheduled end time.  I think it worked well because the audience was full of people actually starting companies, and they came well prepared (they were all avid readers of tech blogs and had seemed to have done a lot of research).

I sketched some notes for the class which I’m posting below. I’ve written ad nauseum on this blog (see contents page) about venture financing so hadn’t planned to blog more on the topic.  But since I wrote up these notes already, here they are.

***

1. Best thing is to either never need to raise money or to raise money after you have a product, users, or customers.  Also helps a lot if you’ve started a successful business before or came from a senior position at a successful company.

2. Assuming that’s not the case, it is very difficult to raise money, even when people (e.g. press) are saying it’s easy and “everyone is getting funded.”

3. Fundraising is an extremely momentum-based process.  Hardest part is getting “anchor” investors.  These are people or institutions who commit significant capital (>$100K) and are respected in the tech community or in the specific industry you are going after (e.g. successful fashion people investing in a fashion-related startup).

4. Investors like to wait (“flip another card over”) while you want to hurry. Lots of investors like to wait until other investors they respect commit. Hence a sort of Catch-22. As Paul Graham says:

By far the biggest influence on investors’ opinions of a startup is the opinion of other investors. There are very, very few who simply decide for themselves. Any startup founder can tell you the most common question they hear from investors is not about the founders or the product, but “who else is investing?”

5. Network like crazy:

  • Make sure you have good Google results (this is your first impression in tech). Have a good bio page (on your blog, linkedin and about.me) and blog/tweet to get Google juice.
  • Get involved in your local tech community.  Join meetups. Help organize events.  Become a hub in the local tech social graph.
  • Meet every entrepreneur and investor you can.  Entrepreneurs tend to be more accessible & sympathetic and can often make warm intros to investors.
  • Avoid anyone who asks you to pay for intros (even indirectly like committing to a law firm in exchange for intros).
  • Don’t be afraid to (politely) overreach and get rejected.

6. Get smart on the industry:

  • Read TechCrunch, Business Insider, GigaOm, Techmeme, HackerNews, Fred Wilson’s blog, Mark Suster’s blog, etc (and go back and read the archives).  Follow investor/startup people on Twitter (Sulia has some good lists to get you started here and here).
  • Research every investor and entrepreneur extensively before you meet them. Entrepreneurs love it when you’ve used their product and give them constructive feedback.  It’s like bringing a new parent a kid’s toy. Investors like it when you are smart about their portfolio and interests.

6. How much to raise?  Enough to hit an accretive milestone plus some buffer. (more)

7. What terms should you look for?  Here are ideal terms.  You need to understand all these terms and also the difference between convertible notes and equity.  More generally, it’s a good idea to spend a few days getting smart about startup-related law – this is a good book to start with.

8. Types of capital:  strategic angels (industry experts), non-strategic angels (not industry experts, not tech investors), tech angels, seed funds, VCs.

  • VCs can be less valuation sensitive and have deep pockets but are sometimes buying options so come with some risks (more).
  • Industry experts can be really nice complements to tech investors (especially in b2b companies).  (more)
  • Non-strategic angels (rich people with no relevant expertise) might not help as much but might be more patient and ok with “lifestyle businesses.”
  • Tech angels and seed funds tend to be most valuation sensitive but can sometimes make up for it by helping in later financing rounds.

9. Pitching:

  • Have a short slide deck, not a business plan. (more)
  • Pitch yourself first, idea second. (more)
  • Pitch the upside, not the mean (more)
  • Size markets using narratives, not numbers (more)

10.  Cofounders: they are good if for no other reason than moral support. Find ones that complement you. Decide on responsibilities, equity split etc early and document it.  (Legal documents don’t hurt friendships – they preserve them).

11. Incubators like YC and Techstars can be great.  99% of the people I know who participated in them say it was worth it.

12. To investors, the sexiest word in the English language is “oversubscribed.”  Sometimes it makes tactical sense to start out raising a smaller round than you actually want end up with.

33 thoughts on “Notes on raising seed financing

  1. Great stuff, Chris.  As a corporate lawyer for entrepreneurs, I cannot emphasize enough the importance of #5: “Network like crazy.”  Indeed, this is how the game is played, and it requires tenacity and resourcefulness – qualities that every great entrepreneur possesses.  I discuss this issue in detail in my post, “How Do I Raise Seed Capital If I Don’t Know Any Investors? – Part 1” (see http://bit.ly/iTeTE8).

    Keep up the great work.

    Cheers,
    Scott

  2. RussellF says:

    Great great summary. One addition to #5 … if you want to network and meet investors probably the most efficient way to do so is to get your startup on AngelList. Not everyone gets funded on AngelList, but the time you spend networking in the real world is time lost cranking out code … and AngelList can give you some of that time back.

  3. Thanks for this repost – I was unable to make it even though I signed up because I was meeting with a potential investor!
     
    Sure could have used some of this advice then and there, but it’s still good here and now. Looking forward to more Skillshare classes from members of the Tech community like yourself!

    I’d love to get a class on how to set milestones and budget for them once you have landed some capital. Also be great to hear from entrepreneurs who are in the process of doing that who can share their experiences.

    Here’s to more learning!

  4. Guest says:

    Great comments, tips & suggestions. I was wondering if you could elaborate a bit more on #4? I thought I read a post of yours somewhere that made a suggestion to try NOT to talk about who else is investing because you don’t want to come across as trying to get folks to be bidding against each other or create the appearance you are hotter than you are. It may have been someone else’s blog but I thought it was yours. I cannot find a post now so not sure. As others have suggested, #5 really seemed to resonate. Thanks.

  5. manpreet says:

    Very informative post! A lot of useful stuff for someone looking for funding along + several useful outbound links.

  6. manpreet says:

    Very informative and handy post for someone trying to raise money. Thanks for writing this!

    In reference to #1:
    Just curious, how important is a mentor for a startup with first time entrepreneurs who are trying to get to a product before raising money (or even after that)? Are angels usually open to taking entrepeneurs that they like under their wings (so to speak)? Or does this happen only in the context of an incubator like YC, techstars etc.

  7. I’d suggest different approaches for seed vs Series A.  (I think you might be thinking of this post about raising a Series A) http://cdixon.org/2011/05/04/best-practices-for-raising-a-vc-round/

    The difference tactics arise from structural differences in rounds.  Seed rounds are very often a number of investors investing small amounts, so they aren’t really competitive with each other.  (E.g. Founder Collective prefers to invest with other seed investors).  For Series A rounds you usually have just 1 or 2 VCs taking up the majority of the investment, so they can get competitive, which can be good for you.

  8. Guest says:

    Aha, there it is. There was a delay between the receipt that you posted this and me actually being able to see it. Anyway.

    Thanks, that is the post I remember I do believe. A subtle nuance and distinction and I can see why the approach could be different between a Seed & a Series A. Thanks so much for the clarification and additional information.

  9. awesome list, Chris. 

    #2 is overlooked these days.

    #5 and #6 are so important.  part of that is showing that you’re hustling and do this ‘no matter what,’ which creates a line not a dot, to borrow some language from Suster.

  10. buzzlair says:

    #5, do you have any advice for socializing in a local tech community we first attending (we know no one). It must be awkward. Any advice on this?

  11. Foundersuite says:

    Super-good stuff here Chris, fantastic bit-sized nuggets of wisdom. My favorite lines: 

    “Legal documents don’t hurt friendships– they preserve them” 

    and,

    “To investors, the sexiest word in the English language is “oversubscribed” — (classic!)

    I also wholeheartedly agree with your comment about fundraising being a momentum event.  I have been through the process a few times and find that we typically spend 80-90% of the total time/effort on finding that first anchor investor or two, and the remaining 10-20% filling out the rest of the round.  

    It’s amazing how much easier fundraising becomes once you get that first domino to topple; this is particularly true in forums like AngelList.  I would add that sometimes founders need to “do what it takes” (i.e. offer sweetheart terms or incentives) to get the first anchor on board.  

    Nathan

  12. Pingback: Trackback
  13. Pingback: Hay Day Hacks
  14. Pingback: Trackback
  15. Hello! I could have sworn I’ve been to this website before but after looking at some of the articles I realized it’s new to me.
    Regardless, I’m certainly pleased I stumbled upon it and
    I’ll be bookmarking it and checking back frequently!

  16. Wonderful blog you have here but I was wondering if you knew of any user discussion forums that cover the same topics discussed in this
    article? I’d really love to be a part of community where I
    can get feed-back from other knowledgeable individuals that share the same interest.
    If you have any suggestions, please let me know.
    Cheers!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s