Loading...
Answers
MenuWhen is the the right time to seek out seed capital?
I've found a lucrative e-commerce niche.
I'm gaining traction in my proof of concept stage.
Answers
I'm a small-time investor and have been working for and with startups for 13 years.
The time to take seed capital is:
- When you've proven demand for your product by making sales.
- When you have at least one repeatable, predictable, and profitable system in place for selling your product.
- When taking an equity investment would let you grow the company faster than the other means that might be at your disposal: bootstrapping, debt financing, organic growth, joint ventures, etc.
There's a trade-off. You want to get the idea validated up-front and get as far as possible as you can on your own, but not spend so much time doing this with meager resources that the opportunity passes you by.
You don't want to give away the whole company to your investor, but you also don't want to stunt your growth and give up huge potential profits just because you were holding out for slightly better terms.
The better your sales, and sales growth, the better the valuation you'll be able to negotiate.
A great idea and a proof-of-concept alone are worth basically nothing.
A company with sales is worth more.
A company with sales growth is worth even more.
A company with month-over-month sales growth, ongoing relationships with customers who repurchase, and steady-state profitability is worth *much, much* more.
(Steady-state profitability means that if the company's number of customers stays the same, the business operations turn a profit. Often, early-stage companies that have a recurring-revenue business model will spend more to acquire a new customer than they earn from the first sale; the cost of acquisition is amortized over the lifetime of the customer. This is because they want to grow their recurring-revenue base and increase future profits at the expense of short-term negative cash-flow.)
All that being said, if you think you will need venture capital funding in the future, you should start looking for it long before you're going to need it.
Have a "Plan B" in place, too. Don't get stuck with your back up against a wall, hoping and praying that your seed round will close before you start bouncing checks. If your investor knows you're going to go bankrupt without the investment, they have a lot of leverage for getting very favorable terms!
We've raised close to $1M in seed capital. We've done things right...and done things wrong...so take this with a grain of salt.
Your question was about SEED capital. One answer I saw (from Brian) was thoughtful, however, he's talking more about early stage capital (repeatable sales, profitability, etc). The reality is, many startups find that they can't get to this stage without seed capital to get started.
One answer: As soon as you have a prototype, and thoughtful feedback from customers. Being able to show an investor (literally) the vision for your product -- and, at the same time, that you've done due diligence with customers in the form of customer development. If you've done these two things, then you might be ready to talk to *seed* investors. Might you give up more equity at this stage than if you're profitable? Sure. But again -- but if seed capital is what you *need* to get to that stage, then this is the time to attract it.
And once you're at this point -- have *as many* conversations with potential seed investors as possible. It may take 10 no's to get to 1 "yes -- and even then, you want to make sure the investor is the right one for you.
Another answer:
Don't go after seed capital at all. Bootstrap the company, and skip this stage altogether. Fund the company with customer revenue. Keep in mind, when you take on investors, you have a very real responsibility to them. Instead of "no boss", you might have ten. Although, who are we kidding -- even bootstrapping founders still have multiple bosses (employees, customers, etc).
I hope this helps.
Being there I have to say that once you have paying customers. Your venture's market cap can help determine the % of paying customers you might need to start pitching and be considered. With that said it never hurts to just approach a few angels, let them know what you have and ask for feedback on what they would "require" ultimately you have to please who is giving you the money... They all vary.
Investors are risk averse and follow the crowd - start gathering momentum now and they all will want to join the round.
Financing rounds usually take longer than you think.
If you have traction, you can start seeking investment.
Related Questions
-
Who are some of the pre revenue start up friendly investors available to the Vancouver Canada region?
AngelList is your best bet. Since you're asking the question, chances are you don't have a way to get introduced to these investors. The simple truth (like it or not) is the chances very low that you'll get a deal done without an introduction from someone they trust. AngelList can help with that, so can going to networking events. And finally, If you're the introverted developer type, you can also get their attention by just building something really cool on your own, followed by some serious traction. Arguably the best strategy of them all.DR
-
What do you ideally need in place to raise Seed Funding? Will an idea and a good team get funded or do you need company with hundreds of customers?
When it comes to raising money you must remember that risk is a perception. Your job is to drain the risk! Below is a link to a resource I provide my investors. The 50 questions are specific to product design/development but the 15 categories are questions that apply to any industry. If you can answer these questions about your deal you will have gone a long way to "drain the risk" for your investors and get funded. http://www.jaredjoyce.com/freetreats/50questions.pdf Once you have answered the questions for your deal schedule a call with me and I can help you integrate the answers into your investor pitch.JJ
-
What are the tax consequences for founders if the seed round investors take common stock instead of preferred?
There shouldn't be any tax consequences for the founders if you've made 83b elections--the election meant you paid tax already on the full value of the stock at the time of the election (presumably zero) even though it was subject to future forfeiture. If you sell newly-issued stock there should be no tax impact. If you sell your own common stock, you'd pay tax on the gain, but I doubt that is what you mean here. Of course, you should not take the free advice dispensed on Clarity and consult your own tax preparer--this is not tax advice.BS
-
How much potential value does a startup need to have in order to attract VC funding?
Wow, sounds like you have an amazing profit margin. The key is GROWTH. Continuous and stable, with the ability to predict future growth. Therefore, your market niche is very important, to feed the growth curve within an order of magnitude and can't be too vague. As others have mentioned, investors look for a $100-200 million valuation potential, as well as the ability to morph or expand as needed. Contact me if you want to discuss more.TN
-
So we created a good pitch deck for our startup, how do we find investors?
Create an investor list who have a history of investing in similar lines. It may lead to deep research. Reach out to them via mails/calls for an introductory call. I am sure someone might be interested in your product but patience is the key. I helped a similar client in the past with some back ground research. If interested, I can help you too.. Good luck.SN
the startups.com platform
Copyright © 2025 Startups.com. All rights reserved.