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.
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.
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:
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.
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 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 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 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.
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.
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.
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:
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.
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.
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.
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.
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.