Startups need capital to keep growing their operations past the pre-seed stage; this is where seed funding comes into play. Admittedly, it’s been a difficult year for startups to raise seed capital, given investor caution and global economic instability. But this shouldn’t discourage you from attempting to secure a strong round that will get your product to the finish line. Here, we’ll explore the seed funding process, how to craft solid business plans and pitch decks, and matching with the right investors.
What Is Seed Fundraising?
If pre-seed funding is the first step to laying the groundwork of a company, the seed stage is there to add the finishing touches to its foundation so it can grow in the industry. Unlike pre-seed funding, companies seeking seed funding know who their audience is. At this stage, the challenge is getting the product to them. This is when you start expanding to new offices and hiring more staff to refine the product and research the market to reach product-market fit (PMF).
The seed round is the fuel that propels startups into the market, leaving them enough cash to stay afloat until a Series A funding round, where startups begin to consolidate themselves as possibly profitable businesses. On average, there are 24 months between both stages.
The Benefits and Challenges of Seed Fundraising
Startups are usually high-growth companies that go through several cycles of getting cash, burning it, and growing in the market before they become profitable and build a name in the industry. Funding rounds are essential to keep this process going until a startup can hold its own.
The biggest benefit of the seed stage is receiving capital outside of family and friends to get that first cycle of burning and growing going. A successful seed round will also position a startup in the media and have investors and other industry players eyeing up the company’s next moves.
That being said, it’s important to stay aware of the challenges. As investors grow cautious amid economic uncertainties, current seed valuations and deal sizes are shrinking. Consequently, it’s become more difficult to raise a round with just a great idea. Now, investors are looking for thorough market research and a reliable business plan to prove that a startup will be profitable.
Key Steps in the Seed Fundraising Process
To secure seed funding successfully, you must do an internal check of your startup’s needs, look outward to what the market is demanding and explore the most suitable investors.
1. Defining Funding Needs and Goals
No one startup is the same. Plus, needs and goals fluctuate depending on the industry, the current funding market, and internal factors. For example, hardware startups might need more money for CapEx and research and development. On the other hand, a SaaS business might need money for servers, hiring staff for coding, and programming and building robust cybersecurity.
Although goals might change for each startup, the consensus is that you should aim to find PMF by performing exhaustive market research and grow enough to increase the startup’s valuation for when Series A comes around.
2. Conducting Market Research
Before launching a product, founders must become data-driven to know what their customers look for and analyze the industry’s current state. If you’re building a product someone else is already selling and doing well, how is yours special? Why should customers go to you instead?
A startup can begin by doing primary research to gather information firsthand from interviews and focus groups. These answers will help understand the buyer persona, help set a price range for the product, and identify where it needs refining to cater to customers’ real needs.
Secondary research uses external sources to get industry data, like whitepapers and industry reports from other companies. This research will let you know where your company falls within your industry and whether it’s ready to compete in the field.
After doing this, you can include a SWOT analysis that will clearly demonstrate how your startup compares to others in the industry and show that you’re aware of where your idea needs improvement.
3. Preparing a Solid Business Plan
A business plan is a roadmap to how a startup will achieve its goals. This document must be comprehensive and outline how you will achieve financial, operational and marketing goals. This document should also include potential pitfalls and how the company plans to overcome them.
This is where investors will evaluate a company’s viability and if their projections will take them to eventual profitability. You should aim to make a unique business plan, so avoid using online templates.
A business plan must be well-written and easy to digest, with a length of 15-25 pages, including the following sections:
- An executive summary
- Know your audience and write with the investors in mind.
- Description of the company
- Be clear on the startup’s best selling points.
- Market analysis
- Include why the company stands out from competitors.
- Explanation of the product or service.
- Marketing strategy
- Financial projections and budget
- Lay out the company’s unit economics.
- An exit plan
Identifying Potential Investors
Looking for investors should be just as personal as making a business plan — not everyone will be the right fit.
To build your criteria, VC fundraising consultant, Haje Kamps, told TechCrunch that investors tend to focus on factors like a startup’s location, the industry, and its business model (are you business-to-business or customer-facing?). Additionally, you might get brownie points if you have something in common with them that adds extra spice, like sharing an alma mater.
After meeting with your potential matches, ensure you’re all on the same page regarding their term sheets and your vision for the future. Investors should help nurture and upkeep your garden, not get it to wilt and die.
Finding the Most Suitable Funding Sources for Your Seed Fundraising
Different types of investors will suit your startup’s needs better than others. Let’s explore the pool of options:
- Angel investors: These investors provide startups with seed money in exchange for company equity. They’re not always there for the long haul, but their initial contribution is what gets startups on their feet to begin operations. You can find them through your network or by seeking the assistance of incubators and accelerators who have their own network of investors.
- Venture Capital firms: These firms comprise general partners who directly communicate with the startups and several limited partners who provide the capital to invest in exchange for equity. They build relationships with founders and help them grow until the startup makes an exit in the market. Seed investors focus on early stage companies and give smaller sums of money, while growth investors do so for late-stage companies and bigger sums.
- Crowdfunding platforms: This type of funding relies on contributions from many people and mostly happens through online platforms. Here, investors take to all internauts to pitch in small amounts of money. Platforms like Kickstarter allow startups to set a goal and retrieve the money once they reach it. Crowdfunding is a great way to gain social media exposure and market validation before launching the product.
Preparing an Effective Pitch
A pitch is a literal reflection of your startup, where it comes from and where it’s going. You’re aiming to captivate your audience and sell your idea passionately.
Kevin Hale of Y Combinator tells all startups to make their pitch deck legible, simple, and obvious. He drives the point that anyone in the audience should understand your presentation — both the special guests in the front row and those in the back with myopia.
As for the content, a pitch deck should include your mission statement, the problem you’re tackling in the industry, the market analysis that proves your solution’s opportunity, your current traction and financial projections. Graphs and charts, in modest amounts, can help get your points across.
And remember, while your pitch deck should be plenty of facts and figures, make sure to draw investors in with your personal story and what inspired you to start your entrepreneurial journey. People who connect with your background will want to invest in your business.
Having an Insurance Plan
Having an insurance plan can help show your investors you mean business by taking all the necessary steps to protect your company and their investment. Startups could face unique challenges like low sales performance after launching an unconventional product or service, sudden economic fluctuation in emerging markets and the struggles that arise from rapidly expanding your staff. During your seed funding journey, an insurance policy safeguards your business and helps mitigate the aftermath of such situations.
At Founder Shield, we specialize in helping startups like yours see these obstacles through and come out on the winning end. Explore our insurance plans and get in touch so we can work on finding the best policy for your company. You can contact us at email@example.com or create an account here to get started on a quote.