Raising seed capital is a tricky business.
I get approached often by tech startups looking for their first outside funding. They come in lots of different flavors and stages of fundability. Most are making major mistakes in their approach when seeking capital. Remember, this is a professional process you are conducting with legal and financial processes.
One of the easiest mistake to fix is timing.
In their quest for sustainable growth, the elusive dream for most first time founders is that first funding. The idea of outsiders entrusting them with a million dollars to spend is intoxicating. This article is based on my experiences and the typical mistakes I see every week in startup land.
High growth startup companies need seed money to get things going. Without funding most tech startups will die. This can either come from the founder(s) own bank account or from outside investors. They need the money to rent offices, hire staff, and establish their initial presence (website, incorporation, marketing). Most important is that they need to grow into a real company quickly.
The last point above is important — high growth. Without seed funding most startups seeking high growth won’t make it. They need too much capital to keep pace with the market and their competitors. Capital = Growth.
When launching your company there are 2 times to raise your outside seed funding, and one time window to avoid.
- Option One: Before you launch — when you are just starting, probably no product or service yet.
- Option Two: Once your product or service is up and running and gaining traction. In between those times it’s pretty tough.
If you’ve already soft launched, have a product available, are telling the world about your awesome company but don’t have revenue/user growth, you’re probably in the red zone. This is not a good time to ask for outside funding.
- Option Three: Or don’t raise funding. If you’re bootstrapping, you don’t need to worry about either of these options. Your strategy is to create growth with little or no money. There are several great examples of technology startups that do this. Most grow more slowly, but the longer term growth curve can be pretty impressive. They also have the enviable lifestyle of no outside investors.
This article focuses on the first two options.
Option One: Raise before you launch (Pre-Launch)
If you take this approach, you need to have built a relationship with the potential investor — a cold inquiry (a common mistake) hardly ever works and you can ruin your first impression to investors. The “idea” must be well thought out, there needs to be a team or potential team, the presentation needs to be very good, confidence must be high.
At this stage you’re essentially selling yourself and your cofounders. You are being judged on your resume, trust and the excitement you can build. That’s why much early stage funding is “Friends and Family”; your friends and family naturally overrate you and/or can’t say no.
Also, people who know you from your career are great sources, if they have had success or other positive relationships with you in the past, and want to work with you in the future. They’re betting on you.
Pre-launch funding is pretty common in Silicon Valley, but that’s a unique case. There are so many Facebook/Google/Apple multi-millionaires who receive new stock options every quarter, often a few hundred thousand dollars every quarter, that feel they should put something back into the system, plus they like the idea of being an investor. Statistically they usually lose their investment, but that’s o.k., it’s one step closer the the next winner. They risk money they can afford to lose. They are comfortable with “risk investing” more so than anywhere else in the world.
But to get that Silicon Valley angel funding you have to be part of that social network; most of the rest of the world doesn’t have that frothy environment.
Option Two: Post-Launch — Raise when you start getting traction
To me, this is the best time to raise your seed. You’re less vulnerable, pay less equity for your funding, and you have some very specific things to talk about.
PreCog Security, a company I am currently helping to build as cofounder, is taking this approach. As we prepare for our first funding we are assembling a value chain from partners and vendors to clients. Every day it gets a little better and our brand name gets a little more well known.
So far we have no office, minimal travel and other cost cutting, but we are slowly getting stronger and our outside funding needs are getting more strategic. And we will have plenty to talk about when we sit in front of potential investors.
When you delay your raise until post-launch it’s harder to get that early stage super-growth that’s required in some niches and you don’t have the good type of scrutiny from outsiders analyzing your moves. But you also don’t get the bad type of scrutiny, especially from friends and family. You have the freedom to build your foundation and make very quick decisions. Also, if you can build a nice little group of advisors and partners you will have the added momentum from all those people as well as some potential future employees.
In summary, which is best for you depends on your skills, what you’re building and your own tolerance for no income. Whichever you choose, keep your eye on the goal, believe in yourself and your team, read a lot of inspiring articles and drink lots of coffee. Good hunting.
This article is an excerpt from an upcoming book about Startup CEOs by the author.