It’s one thing to throw a few hundred bucks a month at a side-project or hobby over the years, and another altogether to potentially be onto something that warrants quick decisive action. The process of raising seed capital can be finicky, so I offer friendly advice on how to survive this critical initial phase without decimating your startup.
Disclaimer: This article’s directed at untested startup founders in the initial phase looking to raise seed capital on the way towards proving the need for substantial investments from angels like myself and VCs: $5-$20,000.
For argument’s sake let’s say you and a good buddy built a decent prototype for a savvy hand-sized tech product, maybe a wearable, and some simple software but…
…other than friends/random people clapping like seals, you have 0 actual market research to back your assertions/theories and develop the project into a serious business model. Before approaching bigger fish looking to fund a startup, you decide to ask close friends, friends of friends, family, etc.
Typically the two obstacles you run into are, well,
- How much your startup’s going to need and,
- How much it’s worth.
Don’t fret, we’re only talking simple math and round numbers right now. Once you put together how much you’ll need for the first phase, you can project out a bit.
Step 1: Value Engineering
Later on when there’s plenty of actionable data, you’ve built sweat equity (your own hard work), validated your product idea to a degree, entered an incubator program, or are taken under the wing of an angel investment group… more official valuations will get ironed out quickly.
Until then, you just need a rough 18-month runway to take off.
- How much capital will you need to get a branded and user-ready prototype developed, launched, and tested in 18 months?
- How much will be spent on outsourcing talent and acquiring an initial test audience?
- What does your supply chain look like? How’s manufacturing going to work?
- Good news is (often) friends, friends of friends, associates and family don’t demand percentages of ownership. They’re just interested in getting their money back, perhaps with interest.
Download basic pitch/valuation templates from the net to have something to go off of, or perhaps invest in quality business planning software…whatever it takes to effectively estimate how much initial capital you’ll need and where that money’s going.
Be strategic! Break those outgoing cash funnels down into finely-tuned strat-webs.
Should your product get some traction, what angel investors and VCs will look for is your ability to stretch each penny as far as it’ll go without sacrificing too much.
Tip: Think about it like this. Each hour you plot out your startup’s foundation will increase its chances of sprouting by 10%. And yes, without a doubt, 10 solid hours spent detailing a specific strategy with rough valuations/estimates is going to increase your chances of success 100-fold.
With these numbers in hand your confidence level shall rise, your mind will investigate new creative potential, you’ll begin seeing deeper layers of innovation… and be able to approach investors with a little cash to throw your way without asking for too much ownership in return.
Speaking of which…
Step 2: Investor Solidarity
When going outside your personal/professional networks, in my opinion, it’s ESSENTIAL to bring investors into the fold who share your vision. It only sounds cliche until you experience the opposite and if that’s the lesson you need, then by all means experiment.
Otherwise, even if all you’re after is money and it’s 100% greed driving you to burn the midnight oil, then collaborate with investors who share your wealth generation ethos but have experience working directly in your niche. For example, I only invest in startups that involve tech manufacturing because it’s a specialty of mine.
This improves my ability to hop aboard and make sweeping impacts relatively quick and easy vs. me having to try and wrap my mind around and optimize a completely unique supply chain.
Then, it’s about avoiding equity dilution.
Cutting the Equity Pie
Giving up too much ownership of your company for support too early will not only stave off investors in the future, but destroy your startup’s ability to remain fluid until the much more, shall we say, lucrative opportunities start raising eyebrows. In an ideal world, you’ll find like-minded investors who ask for small slices of the pie early on and scale as your startup does…with them playing an integral role in your success, rather than just being some occasional voice on the phone, or in an email.
If I’m looking at a startup with fabulous market history and capital generation, where I can make huge impacts and see success… but where equity’s already been heavily diluted between founders and other investors, then, where does that leave me despite the fact I may bring serious heat to the table?
Keep it Between 10-20% During Seed Funding Phase
Great, so at this point you’re working on foundational valuations/estimates, detailing the financial plan, and looking to find/attract early investors who share your vision. Let’s talk about refining communication.
Step 3: Tackle the Copy!
Copy. Words. Until you get this part, at least pretty well-refined, don’t consider approaching any serious investor. The process itself of carving out great copy will optimize everything about your business to a nearly exponential degree.
Nope. Doesn’t matter if no one involved is a writer, or copywriter.
Just do the best you can, then hire one and give them your “seed copy”. This is typically going to cost far less and make their job way easier. Here are the basics you’ll need. Everything else is gravy.
- Brand Story: Where the brand and what it offers comes from – vision with personal flavor!
- Executive Summary: This is the written form of what amounts to a 2 or 3-minute pitch.
- Meta-Data: This is for the primary website or landing page and includes the website’s title, URL/domain, the meta-description, and 1-3 core keywords.
- USP: The elevator pitch, or how you refine your core offering (or the primary benefit/solution) down into a short, concise, no-nonsense sentence. It could even be two words, or a new word made of two words, whatever. All consumers understand what a USP is and we know it when we see/read one.
- Benefits & Features: How you explain the value of your product and getting it from your company.
- Product/Service: How you explain what it is and how it works for the user.
Honestly, this is groundwork. Whether you’re talking shop with an interested associate at work or an angel investor, applying for grants, or trying to get into a program or initiative like my Startup Hunt where you fill out a questionnaire explaining your business, your “copy” needs to be clear.
The Wrap Up: Bring it Together
Sure, you could begin with the copy, move on to valuations and estimates, then start searching for like-minded early investors looking to fund a startup. But, you see what we’re talking about here. Get your copy where it needs to be, put your beginning financial plan in order, and don’t get so desperate you give equity to the wrong people. Hope this helps some folks out there fund a startup without becoming a statistic.