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.