Seed Capital For Your Startup: A Primer On How Much You Should Raise
Any entrepreneur who believes they are ready to raise seed capital is wondering two things primarily: first, how much should I ask for? Second, what percentage should I give away? Having been through this process myself, I wanted to share both my experience and advice.
Before we jump into the numbers, it is important to dig deeper into the term seed capital. This metaphor is money that you believe is needed to help you water and feed the idea during the startup stage. Just like an acorn needs the right weather conditions, an entrepreneur needs the right funding, support, (and in my view) network to help it grow.
Since raising my seed round investment, I am now asked to review people’s ideas and business plans and help work out how much they need to raise. Even before looking through these, I always ask to see the prototype or any existing work that has already gone into the idea. From a test mobile app to 3D renderings and mood boards of a restaurant, this supporting information speaks volumes when trying to raise funds. The wonderful asset all ‘treps have is that they believe in their idea. When I am asked for advice, it’s obvious that these people have lived and breathed concept idea, day and night, 24/7 and have now presented a polished business plan and an attractive five-year forecast.
This was the case for me when I started to raise my investment, which actually started many years ago. I was your typical entrepreneur who had just discovered Apple’s Keynote software and how to use Photoshop in a very basic way. The end result was a 25-page singing, animated presentation with fancy graphics and buzz words. My financial forecast was basically the first-year estimates with a formula adding on 25% growth each year for the next five, making me a gazillionaire at the end of it.
Armed with passion and confidence, I searched Google for investors and pinged out a few emails. My return rate was zero and my confidence slowly dropped. It was during a phone call with an old friend turned investor who said it sounded great and to send over my prototype. After realizing my mistake, I set about making a prototype, investing my own money and time. It was during this build I realized just how different my idea on paper actually was to the real life product.
I scrapped the tree-guzzling business plan and instead focused my efforts on getting test users and a product out there. The product was BBM Baby and the idea revolved around daily deals in Dubai via BBM. As you can see, an idea on paper is only that- execution is the key. BBM Baby didn’t fly, but did form the basis of Brndstr, what is now my company. Without this prototype years ago I would not have raised the seed capital I did. It’s also important to point out that most founders of hugely successful companies such as LinkedIn and AirBnB raised millions with a pitch deck of seven pages or less.
So now down to the numbers: how much should I ask for and what percentage will I give away? First off, I try determine how many partners are part of your startup. The reason partners are so important is not only spreading out the risk, but also because it’s valuable to your idea to have access to sounding board and brainstorming sessions. Whether or not you’re the brains behind the idea, came up with the name or own the domain, you are ultimately partners and a fair split from day one is the correct choice in my opinion. If you truly believe you should own more, set caveats in place for once the business is running and set revenue milestones are met. Just remember that it’s better to own a small percentage of something than a large percentage of nothing.
Now internal ownership is agreed upon, let’s talk money. A lot of people, including myself, started to calculate the amount needed based on salaries, company setup fees and expenses. I agree that this is important, but if on a finance sheet 60% of investment is to pay for salaries, then investors will shy away. My advice, half your existing salary and put this on your forecast. It shows commitment and sacrifice. Regarding the actual amount of money to raise- this comes down to the business and sector you are entering. I can only speak for tech startups with either web- or app-based products; however, I would say that if you have a prototype and believe you have a minimum viable product (MVP), you should be asking for in the region of US$200k with a pre-money value of $300k. This would give your investor a 40% share and a half a million dollars post money valuation.
Given you have everything in place to start watering the seed you should be in a fantastic position. For a product or service valued at less than this my advice is to join an incubator program; lean on the experience and advice of mentors to guide you through the startup stage. Basically, all of my advice originates from having experienced it firsthand. If you’re confident and you have what it takes don’t give up. I was once told failure is only feedback and a bad meeting is only experience. Good luck in your venture, and stay creative.