Seed funding best practices

For most of my 10 years in startups, I’ve been raising VC.  Usually I would join a startup to help it raise a Series B round and would completely miss the seed / angel funding stage. Since last year though, I have been working with younger startups and have closed four fundings at the seed / angel level. In that brief time, here are some of the tips and tricks that I have uncovered:

Amount: Know how much funding it takes to hit the milestones needed to get more capital. Angels invest their own money, so you can’t keep going back for more. Know what you need upfront.

Structure: Many angels will tell you they are interested, but “don’t want to lead”. So, you have all these potential investors but no offer to rally them around. There are two things you can do here:

– Roll your own: Get some consensus on the high level terms that people are thinking about and write a term sheet for them.

– Convertible Debt: Many times people don’t want to lead because they don’t want to set a price for your shares. The risk being that they set it too high and get diluted if / when you raise follow on capital.

Know your audience: With VCs the emphasis is on how big your opportunity can be. Can it deliver “venture scale” returns? With angels, they may be thinking the exact opposite. How quickly can this company get to cashflow positive as an example? Since angels invest their own money and require you to raise follow on $ or get to cashflow positive, their emphasis is more on the credibility of your short term expense plan rather than the hockey stick on your long term revenues.

Motivation: You need to understand what motivates angels. For some its about getting involved and adding value. These people will likely only invest in sectors that they know. For others its about having some fun. Financial returns are important, but most angels recognize how risky an individual investment is. Understand what makes your investor tick and leverage that.

Timing: When you’re chasing many individuals to come together in a round it can be tricky to get them all to the finish line at the same time.  A few tricks here:

– Get an anchor tenant: If one or two people can make a big chunk of the round, get their commitment first. This will make it much easier for others to jump in.

– Run a process: Don’t run serial discussions. Get all your documents ready and start with everyone at the same time. Do group meetings instead of 1 on 1. Make your documents available in a secure online space (ideally with a recorded presentation that people can play at their leisure).

– Catalyzing event: What can you do to get people excited enough to make the decision? Time product launch, partnership or other news to coincide with when you want people to commit.

Commit: Its not easy. You will need to do this 100% while spending the other 100% of your time running your company.

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  • http://www.onegiantmedia.com ogm

    so when can you come to San Diego? 😉

    • http://startupcfo.ca Mark MacLeod

      One of my fave cities. Would love to come

  • http://twitter.com/antonejohnson @antonejohnson

    Oops, I meant "scarce" resources, not "scare" (Freudian slip when referring to legal fees?)

  • http://twitter.com/antonejohnson @antonejohnson

    Mark, this is excellent advice for entrepreneurs. I'm sharing it widely with clients and everyone else I can think of in the tech startup community.

    I have to add a bullet point that's admittedly self-serving: Get an experienced startup lawyer to help with the process. Particularly with the "roll your own" and "run a process" steps, we can add value by giving feedback on both form and substance, having seen many term sheets and closed many financing rounds in the past. I know every dollar counts for today's lean startups, and legal work is lower on the list of priorities competing for scare resources, but a little (smart, efficient, minimalist) lawyering early in the process can go a long way. Just my two cents.

    • http://intensedebate.com/people/mmacleod Mark MacLeod

      For sure. I have posted often on what startups should look for in lawyers and why you need experienced counsel who are in the space. Cousin Joe the general practitioner just won't do.

  • http://www.myschoolbinder.com Roderick

    My app has strong traction and a solid team. We are just getting into the angel / seed stage. I am doing my research as we speak.

    "high level terms that people are thinking about ": You lost me on this.

    • http://intensedebate.com/people/mmacleod Mark MacLeod

      High level terms means arriving at the essential elements of a deal before getting into the legal details. i.e. How much cash, pre-money valuation, ESOP %, type of shares (common vs. pref, any special features), or if debt – interest rate and conversion discount.

  • http://digitalu.wordpress.com Jaafer Haidar

    Hi Mark – Having bootstrapped to date, we're going into our first effort in raising angel money; I learned a lot from the post. We're just starting to get connected and pitch our venture and I'm taking these lessons to heart.

    Thanks!
    Jaafer

    • http://intensedebate.com/people/mmacleod Mark MacLeod

      Hey Jaafer,

      Good luck with your fundraising. Having taken a 2 second look at your business, I would say you will need to be committed to getting out of the services business if you want to raise capital.

      Mark

  • http://www.theprintedblog.com Joshua Karp

    I've had success raising angel money twice, for two different companies, (and the first company had two distinct angel rounds). I've tried to raise money several other times, but unsuccessfully.

    The group meeting can be good and bad. If you know that someone has or is about to commit, having them act as a catalyst in the room with the other rich people can be a good thing. I had my "lead" angel essentially guilt the others, in the room (my apartment, actually) into writing checks on the spot, each for 100K. He had handed me a check for $250K the day before the meeting. I basically set it up, and let the type A lead land it (it sounds a lot more planned than it really was at the time).

    But I've also had a bad experience with a group meeting, where instead of the momentum shifting my way, a smart angel had some very good points that he felt I hadn't really covered. The group essentially spent the meeting having an out loud discussion of why the company may not be successful – and everyone left the room and no one invested. The only silver lining was that 4 months later I sold the company.

    Your comments are otherwise right on.

    • http://intensedebate.com/people/mmacleod Mark MacLeod

      Hey Joshua, you have highlighted a big risk of putting people together for sure. And by definition, people rich enough to do angel investing usually have strong opinions and usually feel they are correct – all the time.

      It depends on how close you are to the angels and how in command you are of your opportunity. Sometimes you may not want to put everyone together.

      • http://www.angelinvestor.ca Bryan Watson

        "…how in command you are of your opportunity." This is an excellent point. I have been in a LOT of pitch sessions to groups. Momentum works two ways. It can entice people to hop on board or it can sway those interested to not invest. You have inspired me, I think, to write on this on my own blog. More to come!

        • http://intensedebate.com/people/mmacleod Mark MacLeod

          Thanks Bryan. Look forward to your post

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  • http://amplifiedanalytics.com Gregory

    Thank you Mark. This is excellent advice. One day I might learn enough to actually getting it done. :-)

    • http://intensedebate.com/people/mmacleod Mark MacLeod

      Thanks Gregory. BTW, have bookmarked your beta invite and definitely intend to log in and check it out