Raising Seed Funding? 5 Things you Need to Keep in Mind
Entrepreneur's New Year’s Guide
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After being an angel investor, advising and being involved in fundraising efforts of a few start-ups, finally I launched my own start-up called Wishfie a few months ago. We raised a seed round to develop our product and team. Here are some of the insights into how the process of raising seed round works and things you need to keep in mind:
What’s Your Skin in the Game? There are lot of aspiring entrepreneurs who want to take the ‘safe’ route. But, if you are not willing to take any risks to realize your entrepreneurial dream, you shouldn’t expect others to take on that risk. If you are looking at Entrepreneurship as a side project, then there’s very little chance anyone will trust you with their money. You should be looking for seed funding only when you don’t have any money to make progress on your idea. If you haven’t put any skin in the game, you’ll find it hard to convince anyone to invest in your ventor
The Right Time: I’ve seen a lot of potential entrepreneurs reaching out to angel investors as soon as they get an idea. While there are some investors who might invest just on your idea and your background, majority of them would want to see lot more than that. Researching, building a prototype, putting the founding team together and getting first few users/customers is the standard process that increases your probability of raising funds.
How Much Should You Raise And at What Valuation? A lot of entrepreneurs find it hard to answer this question. But you need to be super clear on the amount you are looking to raise based on the following: 1) How much money do you need to get to your next goal, which can be profitability, building team, developing your product or scaling up? You need to have some level of projections to come up with this number. 2) How much are you comfortable diluting? If your idea is strong enough, you might come across angels who want to invest more than you want. It could be tempting to raise as much as there’s on offer, but this can mess up your further rounds. It’s neither good for you, nor for your early investors. Do not dilute so much that you have very little equity left for your future investors. Valuation at this stage quite subjective and depends upon your negotiation with your investors, but giving up 7-15% equity for $120K-$200K is quite normal. YCombinator for example, takes around 7% equity for $120K investment.
Remember, Funding is a Means, not the Goal: You should be clear on why you are raising funds, what you are going to use it for and would it take you to your next goal, which can either be profitability for self-sustenance or a scale that’ll help you get your next round. In the later case, remember you are taking a riskier path and you need to be lot clearer and ruthless on achieving the scale you set out for. Just getting funding, announcing it and blowing it all away just to finally close down is going to get you nowhere.
Get the Right Investors And Set The Right Expectations: A lot of entrepreneurs get desperate for funding and end up with investors who neither understand their business nor have any other value to add. Oftentimes, this ends up being the major reason why startups fail. They could end up imposing their ideas, and creating unnecessary stress for you. When they don’t see results, they could get into micromanaging your company, jeopardising the very essence of entrepreneurship. Remember, the investors are not just a resource for money, but also for knowledge and their network. So, selecting the right investors can go a long way in ensuring your venture’s success. An early investor could really be an angel if you get the right one!