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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
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How does one raise funds for a business subsidiary without selling ownership of the "brand" identity?
In my experience, every step you take to complicate your company's structure and ownership rights reduces the likelihood of investors providing your venture with seed funding. To attract seed funding, investors expect a single-minded laser focus on the entrepreneurs' assessment of his or her best path to validating their business and growing it into a very large business as quickly as possible. So the very idea that you are reliant or considering taking multiple paths to success is likely to act as a red flag for most experienced early-stage tech investors. Also, until there is significant traction achieved, an investor is expecting to own everything generated by the business. There are rare occasions where a particular asset, brand, domain or other component of the business can be spun-out (usually in the case where it's a distraction from the core business but there's inbound demand from a buyer), but when I say rare, I mean this happens so infrequently that it's not anything that should be reasonably expected in the course of planning. Speaking candidly, this entire strategy creates a perception (accurate or unfair) that you are undecided on a number of the key questions you need to be sure of before you have a good chance of raising seed funding. I'd be happy to talk to you about what you're doing and help provide some clarity based on what I hear. I encourage you to review my references as I have been helpful to many other Clarity members on these types of issues.TW
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Pre-seed / seed funding for a community app... valuation and how much to take from investors?
To answer your questions: 1) Mobile companies at your stage usually raise angel funding at a valuation equivalent of $5,000,000 for US based companies and $4,000,000 to $4,500,000 for Canadian companies. 2) The valuation is a function of how much you raise against that valuation. For instance, selling $50,000 at $5,000,000 means you are selling debt that will convert into shares equal to roughly 1% of your company. 3) I would encourage you to check out my other answers that I've recently written that talk in detail about what to raise and when to raise. Given that you've now launched and your launch is "quiet", most seed investors are going to want to see substantial traction before investing. It's best for you to raise this money on a convertible note instead of actually selling equity, especially if you are intending on raising $50,000 - $100,000. Happy to schedule a call with you to provide more specifics and encourage you to read through the answers I've provided re fundraising advice to early-stage companies as well.TW
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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
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Is a 23,5% share for an early angel-investor, who is not contributing in the future, too much "dead equity" for raising a VC-backed seed round?
Mark is wrong. I personally know of a handful of companies in that exact same situation and most importantly that have good traction and the cap table NEVER came up once, and each of these companies have raised in excess of $1m in seed funding from great investors this year. Especially if your shares are common shares and/or have no particular unique traits about a share class, and especially if you can document the time and resources your firm expended to build and maintain the service that now has traction, this will not be a problem. Investors give many excuses when they don't want to do a deal but those excuses are rarely the reason for not pulling the trigger. The issue is more likely to be that there are two business folks running a company without a technical founder, which is almost always a deal-killer but that has nothing to do with your equity share. Happy to talk to you in a call if you'd like.TW
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A VC/Angel I am negotiating with wants a clause whereby founders have to sell all vested shares if they leave in good terms. Is this normal?
NO, it's in no ways normal. In reading how you have framed the question, this investor sounds to be acting in bad faith and is also setting you up to fail by introducing terms that are not standard to how quality investors interact with their investee companies. It is however very standard to have a first right of refusal to purchase your shares should you wish to sell. But that is not at all what you have stated. Happy to talk through the particularities of your situation in a callTW
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