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Telling the stories of startup founders and creators and their unique journey. Each episode features actionable tips, practical advice and inspirational insight.
00:00:00:00 - 00:00:26:03
Welcome to the Founders Journey podcast. Inspiration education for Founders by Founders. Hey, I'm Greg Moran from Evergreen Mountain Equity Partners and co-host of the Founders Journey podcast. I'm a multi exit founder and I'm a CTO turned VC and an advisor. So I've been through all the scars and all the journey that, that you're all going through today.
00:00:26:03 - 00:00:45:01
Today, what we're going to do is dive into one of the most critical topics. If you're an early stage startup founder and that's how to raise seed funding. So if you're looking to secure your first round of venture capital or institutional capital, you're in the right place. And over the next few minutes, we're going to cover what seed funding is.
00:00:45:01 - 00:01:10:20
We're going to talk about how to prepare for it, how to get yourself ready to raise seed funding. And we're going to talk about the exact steps you really need to follow to close the deal. So let's get started. So seed funding is really a it's the critical first round of external capital that you raise from investors. So unlike Pre-seed funding you're usually where, you know, you're typically raising from you're either bootstrapping or you're raising from friends and family and things like that.
00:01:10:20 - 00:01:32:13
Seed funding is actually about getting institutional investors or professional angel investors involved. So it doesn't have to be a VC firm, but it may be a very active professional angel investor. So it's different, different type of investor really. So the purpose of seed funding is to give your business the runway that it needs to really achieve those initial key milestones that you're going to need to hit, right.
00:01:32:20 - 00:01:55:22
You've got to validate your product. You've got to acquire early customers. You got to build your initial team. That's what seed funding really does. It really helps you pay for. So it's a bridge between your MVP, your product MVP and the kind of potential series around which is usually a bigger dollar amount. So it's kind of that bridge to get you between those two points.
00:01:55:24 - 00:02:24:27
Unknown
You're going to really aim to show more significant growth metrics here, like early stage revenue. Whereas in a series around you're really scaling that revenue. So it's just a different it's a different little bit of an earlier stage. But remember seed funding isn't just about the money. No capital raise is just about the money. It's about finding the right partners who really believe in your vision and are willing to take the risk on investing early.
00:02:24:29 - 00:02:49:01
That's a different risk profile than, say, a series A investor, or certainly a series B investor or private, you know, later stage private equity. So let's start to move on to how to prepare for this. Right. You can't just go into a seed round totally unprepared. You can sometimes pull that off in more of a friends and family round, but you really can't go into it, you know, really unprepared.
00:02:49:01 - 00:03:16:05
You've got to really have your ducks in a row. You need to demonstrate to investors that your business is ready for their money. Here's a checklist of everything you really need before pitching for seed funding one. You probably need to develop a strong founding team. Now, they don't necessarily need to be all full time employees. You may not be able to afford that yet, but you have to realize that your investors are betting on people as much as they're betting on your ideas, more so on the people.
00:03:16:07 - 00:03:39:06
Right? Because if people are going to be the ones that execute that ideas, you need a founding team that really brings complementary skills to the table. So if you're a highly technical founder, you've got to have somebody who's great with sales, marketing, vice versa. If you're strong in the business side, you're going to need a co-founder with deep product or technical expertise, industry expertise, something like that, to really round out those skills.
00:03:39:09 - 00:04:04:29
The skill sets. Number two, you need to create an MVP minimum viable product. An MVP is the simplest version of your product that solves the core problem you're addressing for your target market. I just said a lot there. It's about the minimum version, simple version that solves the core problem in your thesis for your target market, right?
00:04:04:29 - 00:04:28:06
You need to be able to do those three things. It doesn't have to be perfect. It doesn't have to have all of the bells and whistles you want on future versions. But it does need to show potential investors are going to ask, what problem does this solve and how do you solve it? Your MVP should clearly demonstrate that it should be a usable product by your target market.
00:04:28:06 - 00:04:52:08
Just a simple version of that. Number three, you need to build initial traction. So before you go looking for seed funding you need some form of traction. It could be user growth, early revenue, strong partnerships, some thing that demonstrate some market validation will make this a lot easier for you. Instead of saying, hey, trust me, I know there's a market, right?
00:04:52:10 - 00:05:15:00
You've got to be able to go out and show that you can get somebody to partner with you or buy your product that is not your cousin, right? But somebody who can, who will is actually in the market, in your target market that says, hey, yes, this is something, that I'm taking seriously and give you that, give you that credibility that you need when talking to investors.
00:05:15:04 - 00:05:42:18
Next. Number four, you need to get your financials and your projections in order. You need to have a real financial model. I cannot tell you how many companies that I see on a regular basis. I do invest in seed, financing. I do invest in seed funding and more. I would say more often than not, those founders that are coming to me don't have a clear picture of their burn rate, their cash flow, how long the seed money is going to last.
00:05:42:20 - 00:06:04:06
These are usually they either don't have those projections or they're just pie in the sky really built on nothing. Investors want to know that their money is going to be invested wisely, and that you've got a plan to grow in a sustainable way. So you're not just repeatedly running out of money, right? That's the thing that you really that you really trying to guard against.
00:06:04:06 - 00:06:25:14
That's the biggest risk of an investor. Okay. You know, I'm going to write $100,000 or $200,000 check today, but how much I'm going to have to write next month and the month after and the month after. If you keep running out of money, that's a bad place for a seed investor to be. We understand as a seed investor that we're going to have to reinvest, but we don't want to do it because you keep running out of money.
00:06:25:14 - 00:06:56:05
We want to do it because your growth rate is escalating. Number five, you got to craft a compelling pitch deck. Your pitch deck is what you will get. What's going to get your foot in the door, right. Besides referrals, which are even more important, but any investor is going to say to you, okay, send me the deck. You want to have something that really explains the problem, your solution, the market opportunity, your business model i.e. how are you going to make money, and most importantly, why your team is the one to execute on this vision.
00:06:56:07 - 00:07:19:11
So let's get into how do I identify the right investors, not all money is created equal. Over the course of my career and many businesses, I've had great partners and I've had not so great partners. You want investors to bring more than just capital to the table. So let's break down different types of investors that you're going to encounter in the seed round.
00:07:19:11 - 00:07:41:14
Right. So one you're going to see angel investors. These are typically wealthy individuals who invest their own money. They're often the first to invest in early stage companies. And they can really be an invaluable source of connections, expertise. Angel investors that have domain expertise in your industry or your market man, they are. They're worth their weight in gold.
00:07:41:14 - 00:08:10:16
Find angels who have experience in your industry and can introduce you to key players, whether that's partners, talent, customers, something like that. Look for what they can bring. In addition, ask that question of angel investors specifically. And the second type venture capital firms, seed stage VCs. Again, Evergreen Mountain Bike fund. We do invest in seed stage. They're we're looking for high growth potential companies.
00:08:10:18 - 00:08:33:29
So in order the way the VC business model works, we have to have high growth in order for us to make money. So we often write bigger check sizes. You know, seed investor, seed seed stage VCs will write bigger check sizes usually than than an angel investor. But we also have much higher expectation around governance, around execution, things like that.
00:08:34:01 - 00:08:56:08
We need that. VCs need to see a clear path to scale and a potential for really significant returns. Otherwise it just doesn't fit the model. And you're better off staying with angel investors, who usually will sometimes have a little bit, reduced expectations because they may be doing it for other reasons. So the third type of investor you see in seed rounds are syndicate.
00:08:56:11 - 00:09:18:21
So that's typically a group of angel investors that will pull their money together to invest in startups. You see a lot of angel groups in different cities and things like that. This can be a great option if you're looking for smaller investments. For most multiple parties, you can often get less dilution. So better terms and you get that compounding effect of multiple angels trying to help you.
00:09:18:21 - 00:09:36:09
So again this can be really be a great option for seed stage. For a seed stage round, a lot of times you're not just focusing on one of these things. You really you may have a combination of a couple of these, if not all of those, type of investors. So the key is to align with investors who can add strategic value.
00:09:36:15 - 00:09:56:21
That's really key, whether that's through industry connections, mentorship for you as the founder or your team or operational expertise. Don't just chase the highest valuation. You got to focus on finding investors who are really going to be there to help you succeed long term, because these initial partners are going to be in for the ride for a long time with you.
00:09:56:21 - 00:10:18:24
So once you've identified the right investors, it's really time to master your pitch. So few things to keep in mind here. Number one, you got to start with the problem. Investors know what specific pain point your problem. They need to know what specific pain point your problem or your product is solving. Make sure you can explain the problem clearly and why.
00:10:19:01 - 00:10:38:27
Now is the time that it has to be solved, right? There may be a broader problem, but if you can't explain why today that problem has to be solved because the problem is so cute. That's a totally different story. You want to tell a compelling story, right? Data is really important, but people connect with with stories, with the narrative.
00:10:38:27 - 00:11:04:12
You got to craft that narrative that explains how you discovered this problem. Why are you personally inspired to solve it? Why is your team passionate about solving this, about solving this problem? So it's really important that you're able to really tell a compelling story, when you're talking about problems. He knows the dog, my dog over my shoulder having a problem getting into the chair.
00:11:04:15 - 00:11:27:24
That's a particular problem I'm not sure it's urgent to solve right now, except for except for the dog. So you got to focus on the team. Investors bet on founders as much as they do the idea more. So I make my investment on the founder first. Before I get into idea, the idea will change, it will morph, but the people are hopefully there to stay.
00:11:28:00 - 00:11:55:17
You've got to highlight your team's strengths, why you're uniquely positioned to really execute on this vision. You've got to show traction and market opportunity. This is where you prove there's demand for your product, show investors any traction you've gained, explain the size of the market opportunity. Here's what not to do. Go in talking about a giant Tam total addressable market and how, hey, if we just achieve 1% of this, nobody believes you're going to achieve 1%.
00:11:55:23 - 00:12:15:16
So we can get a few customers in the beginning and then start to grow those customers over time. And you got to keep the financials simple. You don't need to present a 20 page financial plan, but you do need to show a clear path on how your business is going to grow, how you're going to be able to achieve efficiency in your go to market.
00:12:15:18 - 00:12:34:28
So it's not costing you more to sell the product than it is what you're charging for the product. You got to show when you're going to break even, and you got to show when investors will see returns. So keep the financial model simple, lest we're going to hit on negotiating and closing the deal. So once you've gotten interest from an investor, you're going to receive a term sheet.
00:12:35:05 - 00:12:52:16
We've got other videos on what to look for in the term sheet and things like that. So basically so make sure you check out the other videos on our, on our channel here. This document, the term sheet outlines the terms of the investment, how much equity you're giving up, valuation of the company, what control the investors are going to have.
00:12:52:21 - 00:13:21:28
So here the really key things from a high level you got to focus on valuation comes first right. Everybody looks at the valuation. It sets the price for how much equity you're giving in exchange for the investment. While a higher valuation may seem great, you got to make sure it aligns with your gross growth prospects. You go out and get a huge valuation, but if you're overvalued, it's going to make it harder and many cases impossible to raise future rounds without having to readjust it and do what's called a down round later.
00:13:22:00 - 00:13:40:05
Unknown
Number two is equity dilution. This is how much of your company you're giving up. You want to maintain enough equity to incentivize your team while still making it worthwhile for investors. Right. So it's got to be worth it for everybody here or else this doesn't make any sense for you or your team or investors to get involved in.
00:13:40:07 - 00:14:09:29
Number three, really got to look at investor control. Check if the term sheet includes board seats or specific veto rights. It probably will, especially if it's when an institutional investor like venture capital firm, you want to ensure the relationship is really collaborative and it's not too controlling that you're giving. You will have to give up control, but that you're not giving up so much that you really have no say in the business anymore, and you want to look for long term fit beyond the numbers.
00:14:10:05 - 00:14:34:21
Really think about whether this investor is the right long term partner for your vision. This is a relationship. It's not a transaction. Once you have an investor in, it's literally hard to get them out. It may be impossible to get them out. And a lot of circumstances choose wisely here. Really get to know those investors. Spend time with them, understand them, understand what their motivation is.
00:14:34:27 - 00:14:50:21
Understand what they're seeing in your business on a deeper level, as to why they want to partner with you. So there you have it. That's everything you need to know about raising seed funding for your startup. I shouldn't say everything. There's a lot more, but that will get you started. Remember, it's more than just about the money.
00:14:50:21 - 00:15:09:09
You've got to find the right investors. You got to prepare thoroughly. You got to make sure you're pitching with passion. So if you found this video helpful, make sure you like it. You subscribe, hit that notification bell for more insights on fundraising, scaling, and startup success from the Founders Journey podcast. And if you're watching on social, follow me here.
00:15:09:09 - 00:15:18:22
For more tips on raising venture capital and building your business. So thanks for watching.