How to Raise Seed Funding for a Startup

As a founder figuring out how to raise seed funding for a startup, it can be challenging to know where to start, who to approach, or even how much money you should ask for. This quick and easy guide will get you started on the right path to funding your dream.

Understand the Basics of How to Raise Seed Funding for a Startup

Funding a startup comes in stages, called funding rounds, and can include not just seed funding but also pre-seed funding. Each round serves a specific purpose and has its own goals and milestones.

  1. Pre-seed funding is an optional round that can include contributions from family, friends, founders, and angel investors. It provides early-stage capital to flesh out concepts and develop a prototype.
  2. Seed round funding takes concepts and prototypes to the next level with the help of venture capitalists, angel investors, or even crowdfunding. The seed round gets your startup off the ground with a product you can market and sell.
  3. The series A funding round is the first step toward scaling. At this stage, startups look for larger investors to help them grow, including institutional investors and venture capital firms
  4. The series B funding and subsequent rounds (C, D, and so on) involve even bigger investors to continue growth and expansion. Startups continue with funding rounds until they are ready for an initial public offering (IPO)

What Do Seed Round Investors Want?

Seed round investors want original and scalable ideas with genuine market potential. However, the most important aspect is often the strength of your team.

Seed round investors want to see that your startup has:

  1. A strong team with the skills and expertise to make the startup successful.
  2. A unique value proposition that will stand out in the marketplace
  3. Concept validation that demonstrates initial market traction, a reliable customer base, and a path to revenue.
  4. Scalability without a linear cost increase that can slow growth.
  5. A path to return on investment (ROI), whether through exit potential at the IPO or through direct revenue share.

1. Find the Type of Seed Funding That Fits

Founders have many options for how to raise seed capital. The specific path you take will depend on your own resources, the market you are entering, and even the maturity of your idea.

Bootstrap Funding

The appeal of bootstrap funding is the control founders retain. By using your own money and resources, you are never at the whim of investors. However, that freedom is not cheap, and bootstrap funding places a lot more risk and work on you.

Some founders bootstrap with loans, but placing your home on the line or taking on substantial debt can ruin you if you don't have the backing to protect yourself. A successful bootstrap approach requires sufficient resources to pull it off, and attempting to bootstrap a startup without sufficient resources can even stunt its growth.

Equity Funding

Equity funding is one of the most common answers for founders trying to decide how to raise a seed round. Investors buy an ownership stake in your startup with their seed money. Traditionally, equity funding comes from angel investors and venture capitalists. It can also come through crowdfunding campaigns, and this is a popular option for founders with a concept that has wide appeal or who want to dilute the influence of any one investor.

On the other hand, angel investors and venture capitalists can provide added value with mentorship and their own industry expertise. They are also incentivized to help you make connections and find development and collaboration opportunities. Regardless, they are ultimately investing in order to sell their shares once you go public, and may push you into your series A round before you feel completely prepared.

Convertible Debt or Convertible Note

Convertible debt and convertible note funding give investors options and can serve as a compromise between taking out a traditional loan or selling equity in your company. It also enables you to skip the valuation step of equity funding, which can expedite the entire process and give you a boost in creating a marketable product. This is a particularly good option for startups that are not doing as pre-seed round.

With convertible debt and convertible note funding, investors provide your startup with a loan. However, they retain the option to convert that loan into equity in your startup. They are able to invest earlier or in a less-proven idea with lower risk while still retaining the potential benefits of having an actual stake in your startup.

SAFE (Simple Agreement for Future Equity)

SAFE funding has enjoyed popularity with Silicon Valley startups and investors and shares similar benefits with convertible debt and convertible note funding. SAFE funding is more straightforward and does not have any of the added terms associated with a loan. The focus is on equity conversion rather than a loan instrument.

SAFE investors have a right to equity, but there is no maturity date, interest, or principal. This puts less pressure on your startup but still gives investors a low-risk approach to investing at an early stage. Investors like it because it focuses on putting their money to work in your startup rather than saddling them with the added responsibilities of a lender.

2. Decide How Much Seed Funding You Need

Evaluate Your Business Needs

Your investment ask needs to get your startup to the next funding round. Potential investors will have a good idea of what that requires, and asking for too much or too little can be a red flag that you haven't done your homework. So, do your homework. Be prepared to explain what you need to reach series A and why. Have answers for what every dollar will go toward and how their investment will help your startup grow.

Understand Investors' Expectations

When approaching angel investors and venture capitalists, keep in mind that they know your industry and expect you to as well. Study your potential investors' backgrounds and similar startups they have invested in before. If you are approaching investors who you want to provide expertise and mentoring, you need to be able to articulate why your startup is the right one for them to work with.

3. Prepare Your Pitch

Build an Attractive Pitch Deck

A solid pitch deck gives investors a clear idea of what they are investing in from the first glance. It is a snapshot, not an essay. Keep it concise and punchy, showcasing the best features of your startup, your unique value propositions, and how you will provide the market something it does not already have.

The most important elements of a seed round pitch deck are:

  1. The problem statement and solution that articulates a need and how your startup is going to meet that need.
  2. Market data and insights that show growth potential, a customer base, and your startup's ability to capture meaningful market share.
  3. Key milestones in your startup's early development that demonstrate viability.
  4. A clear path to revenue that shows you have a solid business model with pricing strategies that will lead to sustainable income.
  5. Your team and expertise and how the specific dynamics of founders and mentors provide a unique value proposition to investors.

Identify the Right Investors

Startup investors focus on specific industries that they understand and where they feel confident they can invest wisely and be able to help their investments grow. Know your investors before you approach them. Know what they look for in a startup, what expertise they can provide to help your startup, and what things may turn them off or discourage them from investing.

Know Your Approach

Before you talk to the first investor, you need to be absolutely solid in your pitch strategy. Practice your pitch and determine the most likely questions you will be challenged with. Know what you are looking for in an investment and in an investor so that you can project confidence and knowledge to your investors.

3. Negotiate and Finalize the Deal

Be Prepared for Counteroffers

Know what you are willing to give up and what you are not. An investor may like your startup, seem like the perfect mentor, and be ready to meet your funding ask, yet want more control than you are willing to give up. Study your investors and know what kind of deals they typically make. Be prepared with counteroffers for their counteroffers. If the deal just doesn't work, don't be afraid to walk away.

Know the Answers Beforehand

You can't know everything a potential investor might ask, but you can try to anticipate as much as possible.

Be prepared for what you will say if an investor says they want more equity or that they need an adjustment to the terms you are looking for. Know what the right investment looks like for your startup, and you will not have to worry about making compromises you regret later on.

Securing a Solid Foundation for Your Startup

Seed funding is the lifeblood of early-stage startups. The right strategy for how to raise seed money can be the difference between a successful series A at the right time and never even reaching that stage. The most important concern throughout is knowledge.

You can read more about successful examples of seed funding in our Seed Funding News section. In this section, you will find news about companies from various industries and different directions.

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