December 17, 2021

A Guide to Seed Fundraising

Rosemary Jordan

According to the US Census Bureau, the number of startups in the United States is at a 13-year high. In a little over a year, business applications have soared to 1.1 million nationwide. That said, evidence suggests that of these new companies, 50% will not survive their first five years. To reduce the chances of this happening, one of the most crucial components that startups must complete is successful seed fundraising.

What is seed funding?

Seed funding is a startup’s initial capital. As its name implies, this is the earliest funding that will help a company get off the ground. Depending on the type of industry a startup is joining, this seed fund will be used to attain the basics like office space, machinery, or staff. However, since most startups trying to raise seed funding have yet to prove their profitability, they are considered a high-risk investment for most banks and lenders. As such, convincing investors to partake in your seed funding is regarded by the U.S. Chamber of Commerce as one of the most difficult yet essential tasks for any company.

Overview of seed funding steps:

  1. Determine your financing options
  2. Prepare your financial records
  3. Meet your investors
  4. Negotiate and close the deal

Determine your financing options

For startups looking for seed funds higher than the typical SME requirement of $10,000, it’s important to start looking at other financing options outside of family and friends. These can include VCs, angel investors, or crowdfunding. Angel investors and VCs are usually more willing to fund larger sums of money. The difference is that angel investors are usually individuals who handle their own money, versus VCs who invest for others. Crowdfunding, meanwhile, is when you publicly pitch your idea via an open platform. Once you’ve determined which financing options best suit you, you can tweak your pitch accordingly.

Prepare your financial records

For most startup founders, there is little to zero business performance to hedge your credibility upon. Hence, investors will be scrutinizing your idea and you as an individual. To verify that you're reliable, investors pay extra attention to creditworthiness. Usually, lenders focus on your credit score. AskMoney details that credit scores are referred to as a financial report card. They reflect how timely you make payments, so the higher your score, the more likely you are to be approved for a loanapproved a loan. Meanwhile, angel investors care more about your credit history. This is defined by the Federal Trade Commission as the history of how you spend. Because startups don’t have extensive credit histories, investors look at your income allocation and existing debts. Since these records are crucial for getting initial funding, keep them as detailed as possible.

Meet your investors

Assuming you’ve done your research on your investors, what you’ll want to do is adjust your pitch to their liking. If they’re VCs, underscore your long-term growth. For angel investors, explain how buying in early will mean bigger ROIs for them. You’ll want to find a way to make your data and pitch more tangible. To ensure you’re including the most pertinent information, complete a SaaS-focused fundraising checklist beforehand to help give you the right story to formulate your fundraising pitch deck. To cater to their more curious and imaginative side, it may help to have short video presentations and product demonstrations so that they’re more likely to remember you. At this point, cement another meeting to propel you into the negotiations stage.

Negotiate and close the deal

In the negotiations stage, expect that you may be hard-balled or offered deals that seem too good to be true. To be safe, take careful note of their requests with you. This way, you can have them checked by other professionals who can vet what is reasonable and feasible. If you’re unsure about what some of the investors’ requests are, this is the time to ask for clarity. Once you’ve found the deal you find most promising, close it as soon as possible. Seal it with a handshake protocol, their signature, and their cash. If an investor has chosen to wire their money, startups can even receive the amount in a matter of minutes.

Seed fundraising can be a scary and arduous experience many startups undergo numerous times. However, with a little practice and a lot of preparation, creating your pitch and sealing the deal can become a smoother and less stressful experience. With the competent specialists and the right investors behind your seed fund, you’ll soon have enough revenue to scale your business and make your ideas of delivering value to the market a tangible reality.

Article written by Rosemary Jordan

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