Raising seed capital takes more than a deck and a pitch. Here are some trade secrets from the other side of the table to increase your chances of raising funds.
Angels (high net worth individuals investing their own money) tend to be the gatekeepers of the venture capital ecosystem. They’re the only people who will invest before it’s a scalable predictable business. They do it for ROI, but mostly they do this as most of them are founders themselves, so they get it. But also, they love it – they love sensing future winners, they love working with founders, and paying it forward.
First, know that seed stage risk assessment consists of three main areas: Team and product – are you credible, can you do what you say you can do, and at a viable cost? Market – assuming you can do what you say you can do would someone pay for this? Financial runway – can you survive long enough to prove the model?
Second, make sure that you qualify for angel investment. You need to be a ‘venture suitable business’ – a candidate for future venture capital which means that once you figure out the product-market fit, you should be able to double revenue every quarter – 32 times over a year (or more). This is explosive growth potential. Positive EBITDA and breakeven are not relevant for Angels. Ability to scale matters – which is high profit margins combined with low cost of customer acquisition and massive addressable market.
Third, due diligence is very difficult at early stage. Help yourself by helping investors: provide studies or research that support your business thesis; provide 3rd party, independent experts to talk to; and allow them to talk to key customers. During the raise, reduce friction by using NDAs sparingly, back up projections with facts, know your valuation and have a rationale for it. To increase your chances of success, avoid pitfalls of messy cap tables, inadequate employee contracts – CIOPP, compensation, equity allocation; unfavourable vendor contracts; and unclear IP allocation.
Fourth, know that Investors benchmark and compare you to others, therefore being part of an industry trend matters. When building a new product ask yourself – are you building a vitamin or a painkiller? Are you solving a pain, or making something non-urgent better? Painkillers get preference in funding over vitamins.
People hesitate on diversity because it makes us work harder, so if you are an under-represented founder, make sure your pitch includes a strong busines case on why you are a good investment.
Fifth, the two basic skills of fundraising are storytelling and spreadsheets. Know your numbers and craft your narrative. Good brand story is absolutely crucial for B2C products. Data beats opinion. Revenue and customer adoption are a key factor. Every $1 in revenue you close will add $5-$20 in valuation for your company.
Finally, embrace humility. No matter how prepared you are, you’ll still make mistakes, and the best thing to do is listen, and accept feedback with grace. Founder coachability is the one of the key factors listed by Angels when evaluating startups.