Understanding what a seed round is, its purpose, and the typical amount of money raised depending on location. Watch the full video — free, no account needed.
Understanding what a seed round is, its purpose, and the typical amount of money raised depending on location. It aims to guide founders through the initial stages of securing their first trench of capital from early-stage investors.
Hello, everyone. This is Alejandro Cremades, and today we’re going to be talking about How to Raise a Seed Round. Basically, what we’re going to be discussing is what is a seed round? What are the different expectations, and some of the different things that founders are going to need in place in order to get that money early-on? So, with that being said, let’s get into it. The first part is to understand what a seed round is. A seed round of financing is ultimately that first trench of money that the founder or the company is bringing in from early-stage investors and it ends up being the first round of financing that you raise as a founder. The goal of the seed round is to raise enough money so that you can build the infrastructure and the key initial pillars of the business in order to scale up. Typically, the amounts of money that you’re going to be raising depends on your location.
For example, on the East Coast or on the West Coast of the U.S., I’m seeing seed rounds that go all the way up to 2 million. But, obviously, if you’re outside of the U.S. and out of those startup hubs, probably you’re going to look at less money. Again, it ranges from as little as 100,000 all the way up to 2 million, as I was saying. The next part of understanding how to raise a seed round of financing is to get what are going to be the expectations that the investor is going to have when you go out there and when you try to raise this money. Essentially, those expectations are going to be that you have already an 18-to-24-month roadmap, that you have a founding team in place, that you have an idea on how you’re going to be building and scaling your platform, and then also that you figured out how you’re going to get to your customers and who your customers are. The next thing to
understand is why a seed round is so important. Just like other really great experts, like super-successful founders like, for example, Reid Hoffman, who built LinkedIn and now is a venture capitalist, they always say that the way that you raise money today is going to impact the way that you can raise money tomorrow. So, for that reason, you want to make sure that this very first round that you’re raising, you get the right people for the right reasons, they’re aligned with your vision and your mission, and they’re going to be there sharing the journey with you on the long run. The last thing that you want is to bring the wrong people for the wrong reasons, and essentially, those could be catastrophic, and it’s going to be super hard to divorce your investor. So, know that once you get that investor in, and they’re part of your cap table, which is recording who owns what of the business
in terms of equity, you really want people that are going to send super-nice signals to the market, people that can attract other people, and people that are going to make it easier for you when you’re raising additional rounds of financing. In this case, it will be the Series A round of financing, which is the next real financing cycle that happens after the seed round. In terms of terms, you want to make sure that you have the right terms. Once you already have an investor that is ready to come in and to make an investment or perhaps that wants to negotiate with you what those terms are going to look like, you really want to be clear as to how you’re going to be getting that money in. You can either do it via equity, or you can do it via debt in the form of convertible notes or safe notes. Typically, what I see is that in a seed round, you want to maybe delay a little bit more,
especially if you’re just dealing with individuals, putting a price tag on the business, maybe you delay that to the Series A. A good way to do that is via convertible notes, where people are giving you the money, and you are promising them that those notes are going to convert into equity once you have a sophisticated investor that is coming in and leaving your round on the Series A, where you literally have venture capital firms coming in and establishing those terms. Again, you can choose whether an equity round is right where you’re pricing the business, where you’re putting a price tag that you negotiate with the investor, or perhaps maybe the right round is to delay that process, and putting a structure, really, in the form of a convertible note, which is a form of debt. The next thing is understanding who you’re going to be pitching at a seed stage. When you’re at the
seed-financing cycle, you’re going to be either going after the angels, you’re going to go after angel groups, or you’re going to go after venture capital firms that are investing at an early stage. Now, you need to be very careful when you go after venture capital firms on a seed stage because typically, the venture capital firms that are coming in and investing at this stage in the game, those are institutions that are putting very small ticket sizes. They’re putting $25,000 here; $25,000 there, so really the spray-and-pray type of model. The problem with these types of institutions is that as they come in, they give you the money – and you’ve got to remember that here, you’re at the very early stages of building your business. If they give you the money, and then, all of a sudden, the business model changes or you do a pivot, then they perhaps may not reinvest in your next round of
financing, let’s say the Series A. That is problematic because then if they do not reinvest, that’s sending a negative signal to the Series A potential investors that are going to be other venture firms, and then they’re going to be like, “Hold on a second. They’re not reinvesting. Why are they not reinvesting? Is there something wrong with the business?” So, you need to be very, very careful because in many instances, getting a VC firm that comes in at a seed round and puts an investment in your business, that could be catastrophic and perhaps lethal if they don’t reinvest on the Series A. So, be very, very, very careful. Again, like when you’re speaking with Angels, typically, the ticket sizes are going to be anywhere between $25,000 to $50,000. You may have some angels, or may even super angels that come in a little bit higher in the form of up to like $200,000 or $400,000. Then, you
have the angel groups where they’re grouping the investors and coming in and putting investments all the way up to 2 million. In many cases, the angel groups lead the rounds, so you may want to consider angel groups as a good way of financing your seed round. The investor is going to want to see in terms of what they’re going to be expecting, in terms of like materials, they’re going to want to see a pitch deck. You can see the pitch deck template underneath this video. You’re going to also have to share with them a financial model where you’re projecting, let’s say over the next three to five years, the growth, the assumptions on the business, and so forth. If they like what they see, then they’re going to give you a term sheet. Perhaps there will be a due diligence process where you’re allocating and putting everything into a Dropbox folder or a Google Drive folder, and you’re sharing
that. Then, if they like that, you go into either the convertible note purchase agreement or a form of a note, which is when you’re doing a convertible note or signing their subscription agreement if you go for an equity round. When it comes down to how you’re able to get all the investors excited, in terms of how you do the strategy, it’s very simple. You just do the research. You see which investors are actively investing in your segment, in your location, and also in your financing cycle. And as we’re saying, in a seed round, which is why you’re raising. You’re going to get founders of portfolio companies that have received an investment in the last 6 to 12 months, and ultimately, you use those founders to get the foot in. This is all about getting someone that has that layer of social proof to get you into the circle of trust, to reduce the amount of time from the first touchpoint to
money in the bank. Ultimately, as a result of using this strategy, you’re going to use the best source to get you in. Those are founders again that are super incentivized to introduce you because they’re going to need more money in the next 18 to 24 months, so by them introducing you to their investors, they’re adding money to their investors. They’re going to need more money, so by doing that, you’re making them look good, so use those founders to get your foot in. Again, just go for advice. As the saying goes, you go for money, you get advice, and you go for advice, and you get money twice. So, just go for advice, and then when you have, let’s say out of 50 investors that you’re engaging with, maybe one says, “I think this is interesting. Perhaps I’d like to become a lead.” Then, at that point, you go to the other 49 investors and say, “We just started a round. It’s going to close by
x-date. We’d love to have…