Most, if not all, startups need to spend on sales or marketing, purchase new equipment, hire new staff, and more. Basically, these startups need to grow. For this growth to take place, oftentimes seed-stage startup funding is required.
The initial capital a startup raises to be able to fund their growth is typically called “seed capital”. Below you will find a brief overview of the essential knowledge startup founders should have about Seed Fundraising.
Why Do Founders Raise Seed Funds?
Many startups will not be able to survive their seed-stages without seed fundraising. The funds required to turn a startup into a profitable business are often beyond the means of the founders and their relatives/friends.
In most cases, high growth companies need to burn capital to be able to sustain their growth rate before becoming profitable businesses. There are some exceptions to the above-mentioned rule in the form of startups that commit to bootstrapping. Bootstrapping your startup basically means growing your business with little to no venture capital or other external investments. Bear in mind, the success rate for startups that bootstrap is much lower as compared to startups that do receive VC/external funding.
Startups don’t just need cash to sustain themselves and grow. Having a sizeable cash reserve set aside can be a major competitive advantage. For instance, when hiring key staff and for marketing & sales purposes. This leads to most startups wanting to raise funds.
When Should Founders Commit To Seed Fundraising?
Investors will be interested in funding your startup if the problem and solution you present are compelling, the team and founder(s) are convincing, and the opportunity and market are real and of considerable size. If founders are able to pitch the above convincingly, the journey of seed fundraising can and should start.
In most cases, the startup will need to provide an idea, a product or at least an MVP (minimum viable product), and evident traction. Fortunately, building a product within the current software development ecosystem can be done rapidly and cost-effectively.
The founder should also be able to persuade potential investors. Simply showcasing your product will not cut it; you will have to convince the investors by proving product-market fit. The exact market opportunity needs to be found, together with the target customers. The product being offered to the target customers needs to demonstrate rapidly increasing adoption.
How Much Seed Funds Should Founders Raise?
Ideally, founders should raise as much money as needed for their startup to break even. This will make it easier to raise funds in the future and also make you less dependant on future funding rounds as your business can survive without new funding. Although, in many cases, startups will still need to receive follow-on rounds of funding to expand and grow their business.
The amount of money you should raise depends on several different variables. For instance, how much you will be able to gain in terms of progress with the capital injection, and how much it will dilute your share in the company. If the seed fundraising only requires you giving up around 10% of your company, you are likely looking at a great deal. Dilution upward of 25% should be avoided.
Whatever amount you are looking to raise, it must be tied to a proper plan as to what the money will be used for and the expected results.
One way of determining how much you want to raise is by multiplying the employee costs with the number of months you want to fund your operations. If for instance, you want to fund your operations for 12 months and your employees cost you a total of RM15,000 a month, you would want to raise 15,000 x 12 = RM180,000. This was just an example of what you could be raising for, and thus, the reason is very dependant on the startup and whatever stage they are in. Generally providing a time frame in which the funding will be used is very much recommended.
How Much Money Is My Company Worth?
Determining the value of a startup can be a rather vague concept. There is no single method or formula that will provide you with the exact valuation of your startup. Generally, you can only come to a rough estimation of the value. Now you might be wondering, how do I convince investors my startup is worth a certain amount? It is simply based on how much you are able to convince investors that your company is worth a certain amount. Usually, you can let the market set your price and then find an investor willing to settle for a similar price or tell you a more realistic price.
A realistic price could be based on comparable companies that already have valuations and thus should function as a pretty reliable valuation source. Please remember that the goal is not to get the highest possible valuation as this can cause difficulties in follow-on funding rounds.
Instead, the goal should be to find a valuation which will enable you to achieve your goals without diluting your share in the company too much and is attractive enough for investors to seriously consider investing in your startup.
The right valuation method for Startups is usually revenue multiples, transaction multiples like GMV multiples or GTV multiples, and so on. All of them fall under the comparables valuation method. Essentially, comparable valuations are what the market is willing to pay for a similar business. This is done using the multiple multiplied by the revenue or GMV or transaction numbers.
For example, if you have revenues of $50k a month, that’s $600k a year. And if the comparable revenue multiples of your closest competitors are 5X (take their valuation divided by their revenue), then your company is worth $3 million (600k * 5X).
The Necessary Mindset
In case an investor does not move forward, please do not take it personally, or see it as the end of the line for you and your startup. Rather, try to get feedback from the investor as to why he/she does not believe your startup is not attractive enough to invest in and learn from the experience. Afterwards, look for the next investor who might be willing to invest in your startup.
As you try to raise funds, discipline is of great importance to work systematically and make the most grounded decisions for your startup. You will want to be diligent and knowledgeable about seed fundraising, network with the right people, and be prepared for your meetings with investors.
During meetings with investors, it is important to answer their questions and listen to their concerns in general. Furthermore, complete transparency is essential as is being direct in your communication. Investors should know exactly what you are looking for and what your expectations are.
If you are interested in growing your early-stage Startup, I wholeheartedly recommend Accelerator programs as they are designed to give young companies a boost in growth, direction, and support.
Learn More About NEXEA Venture Capital
Learn more about startup accelerators
- 5 Ways Accelerators Make Money
- The Basics of Seed Fundraising
- 10 Reasons You Should Join An Accelerator Programme
- What is a Business Accelerator? Definition & Meaning
- The basic differences between Startup Accelerators and an Incubator
- 10 Ways The NEXEA Startup Accelerator 10X Startup Growth