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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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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.Ben SavageBS
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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.Tom NoraTN
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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.Tom WilliamsTW
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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.Sharique NisarSN
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What exactly happens when accelerated startup fails?
I haven't seen a deal structured this way. Usually they get 6-10% equity I exchange for some small amount of money ( ~ $25k ) and tons of mentorship. 15% for $20k seems high ( you are valuing your company at $133k ) but there might be more to it. Accelerators are great specially for unknown founders. It gives them a fair chance of connecting to the people that well connected founders have access to and really get a shot at proving themselves. The accelerator should have access to great mentors, investors and previous successful founders. It should also be vested in the success of the company ( thus the equity ). If you sell them equity for the $20k, you don't owe any money if you fail. They get equity ( in very favorable terms ). If your equity turns out to be worth nothing ( I.e your company closes ) it's a loss for them and you but you should owe any money. Best of luck!Daniel ArroyoDA
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