There is money out there for your startup. Whether you need it right now or are planning ahead for startup development, there is money to be found for a passionate founder like yourself.
This is your essential field guide toward navigating seed funding for your startup.
As a necessary disclaimer, I can’t tell you definitively how much capital you need or when you need it, as that’s determined on a case-by-case basis.
I can give you the answers on what seed-stage capital looks like, what you need to know about accessing it, and details that help compress your founder learning curve.
I serve this alongside helping you gauge the when and what for seed-stage funding for yourself.
If that sounds like your current needs, then you’re in the right place.
What is seed-stage funding?
Your startup is dependent on funding. Hiring, product development, marketing, PR, sales, and equipment purchasing is dependent on your wallet. Your wallet informs your runway in getting a viable solution out to prospective customers.
Seed stage funding is the earliest round of funding. (You may have heard of later rounds of funding, like Series A, B, etc.) The seed stage, or seed money, is the initial stage of funding that keeps the lights on in your business, helps you get organized, hires the right team members, and develops your minimum viable product (MVP).
Seed money is the early investment of capital made into a startup that is done in exchange for partial ownership, or equity, of the company.
How much is seed funding usually?
Seed funding has historically fallen in the ballpark of $10,000 to several $100,000, depending on the source of seed funding.
With the push for investors to engage more in seed rounds, the amount given in seed rounds is steadily growing over the last several years.
In 2020, the vast majority of startups raised up to $500,000 in seed rounds. However, seed funding amounts raised went right up to $5 million.
And, while venture capital leans toward higher numbers on the check, it’s not typically the source of seed money. Seed money amounts are dependent on the source but are enough to get you toward an early prototype to approach your ideal market.
That leads to the following question…
Where can I get seed funding?
Seed funding comes from a variety of sources. This is not an exhaustive list. Common sources include angel investors, crowdfunding sites (like the ones I mention here for certain industries), loans, lines of credit, and bootstrapping methods (mentioned here).
There are also other options which include government grants, incubators, and pitch competitions (however I don’t believe pitch competitions are the go-to strategy for funding compared to other sources).
More specifically, “seed investors” are going to be angel investors. These investors are different than venture capital firms and investors in several ways.
Angel investors are:
- more likely to be hobbyists in terms of investing
- are considered to be more “amateur” compared to venture capitalists
- are less formal when it comes to requirements, rules, and quarterly meetings
- more likely to invest based on seeing the mission, vision, and values of the company, rather than the bottom line
That being said, angel investors are equally passionate about seeing a return on investments. They place money in a business in the early stages because they see the promise. They want to see your founder hustle in making the best use of their money and time in the process.
Hold up, can you get seed funding with just an idea?
The beauty of seed funding is that there is a higher likelihood of getting investment in exchange for your shared business ideas. Seed funding is all about taking chances on a startup concept.
There are many companies that have validated that their idea appeals to their ideal customers and solves a core problem.
The co-founder of Robinhood, Vlad Tenev, got early funding with some hardship and a catch-22 scenario. Early investors did not want to part with hard-earned money because they didn’t know if Robinhood would jump through the necessary legal hoops. However, the company needed the money to develop and do just that. In the end, they raised $3 million in their seed funding round.
For companies running on ideas, the above-mentioned government grants, incubators, and pitch competitions can be avenues to pursue. There are many funding options.
When do you raise seed money?
Seed money follows an idea that solves a core problem, is headed by a team that’s competent to execute, and the early product idea has some form of traction.
This doesn’t mean that you need to have a fully-formed product that investors can see, smell, taste, and feel. You can create an early idea and prototype in a short time period (days or months) to realize the idea.
From there, you need to fit your product to your ideal customer. (This is finding your product-market fit.). When you can gather customers that are nodding their heads and willing to convert on your landing page, you have greater promise for seed funding.
How much money do you raise?
There is a fair amount of controversy surrounding answers to this question. That’s a given when talking about how to secure and allocate someone else’s money.
In my experience, a solid practice is to raise more than you think you need. There will always be bugs, setbacks, and business model and customer segment pivots. Testing and reiterating your MVP takes time. Life happens. When you don’t have any cushion, you are set up for failure.
This isn’t to say you need to raise millions when $100,000 will do. The life of a startup is making educated guesses on the next move. Your decision on how much to raise should be informed on how much time you need to buy in order to reach the threshold of profitability.
In terms of your business plan and planning for your next major step in your business, this funding timeline can typically be noted as 12-14 months out. That’s your runway.
In terms of the amount that you need to raise in that timeline depends on the makeup of your team and your current business expenses. Based on legal counsel fees, marketing, operations, technology and tools, and hiring developers, your monthly spend can be around the $5,000-15,000 mark. (Noting here that costs for engineers and developers can be up to $15,000 per person on your team, depending on experience.)
Calculating that for the next 12 months, you can be looking at $60,000-180,000 based on existing costs. This doesn’t count the amount needed to raise for future hires, compensating the founding team, and accounting for growth. Going along with the above-mentioned trends of seed funding amounts in 2020, a typical raise is $500,000 (and growing).
Bottom line: Accounting for your needs, a ballpark range would be anywhere from $300,000 to $2 million.
A huge frame for reference, but as mentioned, startups are on a case-by-case basis. Not all startups require a large capital investment initially. Not all founders and founding teams opt to pay themselves or payout substantially.
The final point here is dilution. With higher raises, comes higher dilution potential. The common percentage required in seed round raises is 20-25%. Going beyond 25% will impact your equity ownership percentage in later funding rounds as a founder expected to give up additional “slices of the pie”. It’s best to stay in the realm of 10%-15% (if you can achieve).
How do you approach investors for seed funding?
Angels will be the type of investors you want to focus on. Approaching angel investors involves getting clear on several levels (said levels get progressively deeper):
First, you want to determine what you need from an angel investor. Do you need funding? Do you also need insights and expertise? What about having access to network connections?
From there, you want to organize your business plan. What pain or problem does your ideal customer have? Have you validated your product? What is your market size?
You want to get clear on who you’re serving, where you’re at, and where you’re headed in terms of projections (a.k.a. the dreaded number crunching). This can all be wrapped up in a simply outlined executive summary with a brief slide deck to accompany. Don’t worry too much about your financials at this stage, or an overly formal business plan.
Remembering that angel investors are looking for a win-win in putting forward a seed investment, you want to be straightforward in what you, your team, and your company brings to the table. What is your valuation? What “slice of the pie” in terms of equity are you willing to give up in exchange for funding? You want to determine what this looks like in advance.
Then, it’s time to actually talk to these people. How do you find an angel investor when the time is right?
You find an angel investor through networking. However, this doesn’t need to be an overly coordinated effort. This could be having conversations with colleagues at a game, networking with contacts at previous jobs, asking other company founders about their journey. It can also come from socializing on social posts and virtual events around platforms like Republic, which connect companies with investors.
Otherwise, making an effort toward networking events and talks, entering pitching events or investor “office hours” on places like Clubhouse, and checking into incubator-sponsored activities – can all put you in the same circles with a future investor.
You can find investors using the methods I mention here, which include a couple of platforms and ways to dig deeper on social channels that can yield small groups of angel investors that make serial investments.
Finally, there are several listings of active angel investors that are freely accessible online, like the one here.
How long does it take to get seed funding?
Seed funding can be closed on a rapid timeline of several months if you do due diligence in connecting, sharing your company story with passion and enthusiasm, and tailoring your story to the investor in question.
The above are the key, critical ways that founders I know have obtained seed funding. It’s all about getting the next meeting on the calendar to dig deeper.
The investors that you line up meetings with will not see this as a one-and-done conversation. You will need multiple meetings in order to close the deal. Your company is a “big-ticket offer” so it will come with taking time to negotiate.
An investor will close with you based on the following:
- They like you (seeing as you’ll continue to meet and work together in this partnership)
- They see promise in your idea and that you can’t be easily outpaced by competitors
- They see promise in your team (they are not emptying their checkbook for someone/a team who isn’t competent)
- They see you as being someone who has drive and humility (overconfident founders don’t get the pick)
- They know you have taken great care and consideration in your pitch
- They know you’ve done your research on what they invest in and why they do it
- You push for the next steps at the end of a meeting
In the end, raising seed funding is the first of many challenges faced by a founder in a startup company. It may be the first of many future funding rounds.
It’s essential to keeping the cogs turning. In time, you may find early fundraising was a molehill challenge in comparison to where you find yourself.
From my experience working with founders, I can tell you that by keeping your eyes and ears open, you can discover unexpected opportunities that lead to potential investors and early funding. Don’t falter at no. Push on to make your innovation a reality.