Seed investors, also referred to as Angel Investors are individuals who are looking to invest in very early startups. There are usually groups of these investors in your area. You can also look for incubators or accelerators , which are groups that might also provide some office space and access to other experts. So, how much seed money should you try to raise at this stage?
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A seed round is typically a very first and small round of startup financing that allows you to hire a few key people and get your project to a demonstrable stage with a prototype. In some cases, a small seed round can be used to get your business plan completely written.
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If you have to have an income while developing your idea, seed capital can provide this. The friends and family round discussed earlier is usually in the tens-of-thousands of dollars range and is usually just enough to get you started. Seed capital, on the other hand, is typically enough to get you to a venture capital round but is rarely enough to get you all the way to market. So, most often, a seed round will result in investments that are more than the friends and family round but less than a venture capital round.
If you have a functional prototype, you must also have a business plan of some sort — before approaching angel investors. Because you must have some idea of who would want this product, how big the market is and how much money you need to get to the next stage. Your efforts to raise seed funding at this stage almost require it.
Cover your bases and make sure you have a professional and thorough business plan before you approach investors. If you are an engineer, as I was, and your small team is comprised of engineers, and you are lacking the business or marketing experience to put this together, get help.
Find and hire a great marketing person who knows the market you are pursuing. What you pay a great marketing person certainly depends on market conditions, but pay what you need to pay to get the right person. This can be very tough at this stage. The equity component of this compensation package is a bigger question. These are guidelines, not rules and everyone you ask will have a different opinion.
The question at hand is really about what potential seed investors expect to see in a team before committing to investing. Everyone has different ideas about this. Some experts believe that you should have a stellar executive team.
Others believe that having a Board of Advisors made up of big names is required. There are probably cases where one or both of these are true, but from my experience, there are often more important factors that should be prioritized first. I happen to believe that a demonstrable prototype, a well thought-out business plan and a small, hungry team are what early investors expect to see first.
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A Board of Advisors at this point has little value in raising money, and a stellar executive team, or even any executive team, is not really adding any value either. A really good marketing person can put together a more formal business plan that contains the essentials you need to raise money from real Angel Investors.
They can figure out the target market, market size and describe the customers you seek. The investors I have dealt with over my career all seem to understand a few things at this stage. These understandings lead to three important things you must show investors when raising a seed round: A solid business plan, a functional prototype, and a committed team capable of success. But there are some things you should understand about how investors will view your business plan.
First, your business plan and numbers are probably wrong. What investors like to see, and the reason they are even talking to you, is that your product idea and the market you are pursuing are appealing to them.
What they really want to see is a team that can adjust and adapt to the ever-changing market variables and engineering challenges ahead with fire in their eyes and get into the market they are interested in with a compelling product. If all you have is an idea and a small team, it is still possible to raise money, but the amount of equity you will be giving up is commensurate with the risk the investors are going to take. Angel investors know there is huge risk at this point of investment, but even they have their limits.
This is why having a functional prototype is important and why considering more friendly money discussed in a prior article might be best right now. If your potential investors can see some reality and not just arm-waving, some risk is mitigated in their eyes. Others may not be comfortable with the idea that they are no longer percent in control of the business.
If not, you may want to consider going back to the drawing board for funding options. Good question! Thanks to a low cost of entry and plenty of available resources, it has never been easier for entrepreneurs to start a business in How does this translate to funding? While seed capital is gradually becoming more available to all genders, ethnicities and industries and in higher valuations than ever before entrepreneurs must be careful not to fall in love with the dollar signs.
Before seeking seed capital, you should objectively understand the valuation of your startup. Not only is this attractive to investors seed money-based ones or otherwise , but it keeps entrepreneurs from raising too much money that cannot produce a sound return on investment. Set yourself up for an 18 month timeline complete with anticipated milestones to reach and enough of a financial net to catch you if you should fall. Show Me the Funding! About Latest Posts. MyCorporation Contributor at StartupNation.
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