5 Steps to Raising a Seed Round
Fundraising — 6 min read
Every startup needs funding to get off the ground. That money is going to have to come from interested investors, but generating that interest is rarely easy. If you’re ready to start raising your seed round but aren’t sure where to begin, use these five steps to guide you through the process and help your startup gain momentum. Even if you think you have your seed round under control, you might find some tips in this list that could give you the extra edge you need to win over a stubborn investor.
1. Start by making a list of target investors
Your first step should be to make a list of 50-100 investors who are relevant to your space and the stage of company development you are in (likely seed or pre-seed, since you’re reading this). These should be investors with plenty of capital, known as dry powder, available to invest.
As a jumping-off point, you can use Crunchbase to find startups that are similar to yours, but not direct competitors, and look up who invested in them and when. If you are targeting VCs and seed funds, find out which partner at that fund invests in your space—you don’t want to waste your time talking to the wrong person.
As your list of target investors grows, remember to keep yourself organized. Consider creating a spreadsheet where you list potential investors and track which ones you have reached out to or successfully contacted.
2. Find people who can introduce you to your target investors
When building out your list, find people who can introduce you to investors. Many investors will not even take a meeting with you unless you are introduced to them by someone they already know. Setting up an introduction instead of cold calling shows the investor that you’ve done your homework and that you are willing to put in the effort to earn some of their time. It may also put them at ease to know that you have a vote of confidence from someone they trust.
The best people to introduce you to potential investors are other founders the investor has invested in. You can also use another investor who has already invested in your startup. Someone who just happens to know the investor can also give you an introduction, but this scenario is not as ideal as an introduction from another founder or investor.
3. Come prepared
By the time you show up to your first meeting with a potential investor, you should know your pitch inside and out. If you’re using a deck, keep it short and simple. At the seed stage, your pitch deck should include problem, solution, traction (if you have it), team, and market size. If you want, you can also include some information about your competition. Approach your pitch as a conversation, not a presentation — the more engagement you get from the investor, the better.
You should also keep track of the most frequent questions and objections you hear from investors. This way, your pitch will improve each time because you’ll be able to anticipate pushback and have confident answers planned and ready to use.
Don’t be surprised if it takes more than one call to close an investor—in fact, this will usually be the case. Focus on using your first call to create attraction. The process is a bit like dating: You want to clearly communicate that you are interested, and you want the other person to be keen on next steps as well. But, you should also communicate that you have other options and you aren’t going to wait around forever while the investor decides. This creates a sense of urgency that can heighten investors’ interest.
4. Create FOMO
Fear of missing out is very real in the world of startup investments. Every investor wants to get in on the ground floor of the next Snap—they just aren’t sure who that will be. One of the best ways to convince them that your startup will be the one to pull it off is to show them that other investors are interested. Investors want what other investors want.
It’s smart to reach out to cohorts of investors all at once instead of contacting them one at a time. This creates an “auction” of sorts that allows you to credibly tell investors that you are already talking with other investors. You can make your startup look even more attractive if you tell investors that you weren’t planning on fundraising, but you’ve received so much interest from other investors that you are now considering it.
Even if an investor is not ready to close just yet, ask them how much they would be willing to invest if they were interested. This doesn’t require any commitment from them, but it can help you gauge interest and you’ll be able to tell the next investor you approach that you have interest for a specific amount of money.
5. Close the investor
After you’ve talked with an investor and confirmed their interest, it’s time to close. This step is equal parts science and art, and many founders get it wrong.
Once you’ve completed your cohort outreach, circle back to each investor who didn’t explicitly state that they won’t be investing and tell them the amount for which you have interest (X) and the amount that is left in the round (Y). This should happen no more than one week after your last call.
Y should almost always be lower than the total amount you plan to raise. This makes the round seem closer to full, which can cause the investor to feel like their contribution is especially important. Then, you can gradually increase Y as you get more commitments from investors until you reach your goal. (Your goal should ideally be less than 20% dilution. More on this in another post.)
To close, you want the investor to make a clear verbal commitment to investing a specific amount. There is a generally accepted handshake protocol that is used for closing this kind of deal. After getting a commitment from the investor, immediately send them the paperwork via DocuSign and inform them when you are closing the round.
Typically, angel investors and seed funds will wire the money relatively quickly, but VCs may have to make a cash call to their LPs, so the process could be delayed a bit. Trust that the money will come through eventually, but do clarify in advance when you can expect to receive the money or tell the investor that you need the money by a particular date.
Confidently Raising a Seed Round
When raising a seed round, you are going to encounter a lot of rejection. Most likely, you will hear “no” far more often than “yes.” Instead of becoming discouraged, use the rejection to your advantage and make it the motivating force behind your fundraising efforts. It only takes one commitment to start building momentum.
Getting that first commitment may not be easy, but you can simplify the process by giving it structure. Sticking with this 5 step roadmap will keep your efforts organized and on track for success. With the addition of hard work and determination, you’ll be well on your way to hitting your fundraising goals.