Seed Funding 101: Best Practices to Raise a Seed Stage Funding Round
Just like the name suggests, seed funding is funding a company needs to sprout and get its business rooted and growing. It can be essential to the success of some businesses. There are best practices that should be applied in a seed-stage funding round. Here’s an overview of what those best practices are.
Best Practices to Raise a Seed Stage Funding Round
Establishing best practices is generally a good thing. They should be created specifically to your expertise or business and should be followed to make sure that everything you set out to do is achieved efficiently and without hiccups that could derail any success you have already experienced. Plus, best practices can bolster your company’s credibility, and that alone can go a long way toward achieving your funding goals.
Here, we provide general best practices that startups should consider during a seed funding round.
Know You are Ready for a Seed Funding Round
Are you ready for a seed funding round? If not, then you shouldn’t attempt to have one because that only looks bad on you. You have to have more than an idea or concept. You have to have something tangible. Though some startups worry that the cost of rolling out an MVP (minimum viable product) is expensive, it does not have to be. In fact, it is becoming more and more expected that raising a seed funding round means having an MVP.
Know Your Product or Service
Having an idea or an invention is a start, but there must be real-time experience with it. Give yourself and your product or service a few months to test it out. Know how it works, how it is accepted, how it fails, and, among other things, how it behaves in different situations. An idea is a good thing, but you need to know how it actually works so that you can sell it appropriately and with confidence.
Know Your Business
You may have a great product or service, but that does not mean the business will be sustainable. You should have a solid understanding of:
- what your business model is;
- what your purpose is; and
- what your vision and/or mission.
Without knowing these things, it is difficult to sell an idea, product, or service to anyone. Investors need to know there is a future and a market for your product or service.
Create the Right Founding Team
If you do not have a credible founding team – or worse, if you do not have a team at all, that’s a clear red flag for potential investors. You need to make sure your founding team is competent and that each person brings something to the table. You also need to show what sets your team apart from the rest.
Know the Amount of Funding You Need
You need to know your funding goals. You need to know what it will take to reach each milestone to increase capital. You can’t go back and forth with an investor about money. For example, if the investor funds $20,000 after reviewing your funding needs, you can’t change those needs or go back and request more from the investor. That does not make good practice sense.
You also need to know how you anticipate reaching those goals. If you want to use SAFE (simple agreement for future equity), then you should know beforehand what you are willing to give and if you will offer valuation caps or discounts.
Know Your Audience
Who do you want to invest in your startup? Know who you want so you can also know what they want. You should focus your pitch on the latter end. Communicate effectively and minimize the risk these investors take on if they invest in you and your startup.
But also, you want to know if they are high net worth individuals, family offices, or institutions. Further, what are their non-financial terms? It’s great they want to invest in this opportunity, but do their non-financial terms align with yours? If not, at what risk is it to you to agree to these terms in exchange for the funding?
Tap into Your Network
You need to make smart decisions. Good entrepreneurs and startups surround themselves with experienced people who have been there and done that. You should look to your mentors for advice and that advice can inform your decisions. Mentors allow you to have frank and open discussions. There’s no pressure or vested interest so the discussions can be candid.
Know Your Potential Funders’ Motivations
What are your investors’ motivations? For some, it could be simply to be involved with an exciting new product and to help bring it added value. For others, it’s just about making money for themselves later. In the former scenario, these investors may only invest in their own industries because that’s where their interests may lie. In the last scenario, these investors will want to weigh the risks, the costs, and the profits or overall financial return on their investment. Know what motivates any individual investor and sing to that tune.
Commit to Get the Funding You Need
The commitment of investors is second only to your own commitment. You need to first commit to your startup and then commit to understanding all of the above best practices and putting them into actionable steps so that you can raise a seed funding round. Then, you must commit to a successful seed funding round.
Why Should You Startup Use Best Practices to Raise a Seed Funding Round?
Best practices are used to make sure you do everything you can to achieve your business goals, in this case, your startup’s funding goals. Best practices are also a great way to learn about the process and what works or doesn’t work. But most importantly, the whole process of establishing and implementing best practices allows you to understand your purpose more thoroughly and deeply.
Contact an Experienced Startup Business Attorney Today
Fundraising is all about selling, but not your product or service altogether: you are also selling an opportunity to the investor. To learn more about how this works or to discuss seed funding opportunities,contact an experienced startup attorney in Los Angeles. Mohsen Parsa can help you today set up best practices that will render the best returns.