The Ultimate Guide to Raising a Seed Round

Should My Company Raise Venture Capital?

Before diving into the mechanics of raising a seed round, it’s crucial to determine if venture capital is the right path for your company. Christina Cacioppo, founder of Vanta, suggests asking yourself three key questions:

1. Scale: Do you want to build a massive company that could make hundreds of millions of dollars a year?
2. Dilution and Control: Are you okay with selling off 10% to 20% of your company to investors?
3. Funding Needs: Will outside capital provide concrete upsides that bootstrapping cannot, such as building an expensive product or outpacing competition?

If you answered "yes" to these questions, raising a seed round might be the right move. However, remember that raising money too early can teach you to spend rather than earn, as Jason Fried of 37signals warns. Focus on building a self-sustaining business first.

What Do I Need to Prove to Investors?

To attract investors, you need to demonstrate:

1. Proof of Commitment: Show that you’ve left your old job and are fully committed to your startup.
2. Proof of Work: Conduct extensive customer development and research to validate the opportunity.
3. Proof of Insight: Have a clear thesis, whether it’s a simple product with paying customers or a well-crafted memo outlining your vision.

Your conviction in these areas can be the most predictive variable in raising capital. If you truly believe in your opportunity, you’ll likely convince someone to invest.

How Much Should I Raise?

Aim for a 24- to 36-month runway, with a 25% buffer for unexpected events. Most seed rounds range from $2M to $4M, with a typical post-money valuation around $20M. It’s common to sell about 15% equity in a seed round. Remember, it’s better to be oversubscribed than to fail to reach your target.

Seed Round Sizes and Compositions

Seed rounds usually involve a mix of one big check (from a seed fund or multi-stage firm) and several smaller checks from angels or smaller funds. The big check is often the "lead investor," while smaller checks come from strategic investors who bring specific skills or brand value.

Maximizing Your Odds of Raising a Great Seed Round

1. Plan Your Raise: Carve out a two- to three-week window to speak to as many investors as possible. This creates a sense of urgency and scarcity.
2. Do Your Research: Assemble a target list of investors and research their investment history, check size, and philosophy.
3. Prepare Well-Crafted Materials: A minimal deck or memo with a simple budget is sufficient. Quality matters, so make sure your materials are polished and ready before your pitch window.
4. Get Powerful, Warm Intros: High-influence intros from successful founders or influential operators can significantly boost your chances.
5. Practice and Prep Your Pitch: Practice your pitch multiple times and start with less important investors to iterate and improve.
6. Start Small to Build Social Proof: Open a SAFE and start collecting smaller checks while talking to larger funds.
7. Follow Up Sparingly: Interested investors will drive the process. Follow up sparingly and always include positive developments.
8. Maintain Mystery: Never reveal the names of other investors you’re talking to. Describe them in the abstract to maintain intrigue.
9. Term Sheets Matter: You don’t have a commitment until you have a term sheet or a SAFE.
10. Close Quickly: Set reasonable but quick dates for closes to keep everyone moving toward those dates.

Talking Terms in a Seed Raise

The key terms to focus on are the post-money valuation and whether there is a board. Most seed rounds are done on SAFEs, which are quicker and involve fewer legal complexities. Avoid giving up a board director seat unless someone truly remarkable wants to join your board.

How to Choose the Right Investors

The right investors can significantly impact your company’s trajectory. Vet your investors by talking to other founders and asking for their honest opinions. Trust is crucial, so ensure you feel comfortable and aligned with your investors.

Should I Announce My Seed Round?

Announcing a seed round can validate your company to potential customers and hires, but it can also alert competitors. Weigh the pros and cons based on your current challenges and decide if an announcement will help address them.

Closing Thoughts

Raising a seed round is a unique process for every founder and company. By following these guidelines, you can increase your chances of success and set your company on a path to growth. Remember, the right mix of early-stage investors can provide invaluable support and make the journey of building a company more enjoyable.

Good luck, and happy fundraising!

Source Summarized from: https://www.lennysnewsletter.com/p/raising-a-seed-round-101