Even revolutionary ideas need a little help to get rolling. When an entrepreneur has a new business vision, he or she usually needs to raise money for development, marketing, and talent management. Unless the startup founders are high rollers with years of experience, they will look to venture capital and angel investors who will guide them through the first round of funding, the seed stage. 

There are a few guidelines that founders should listen to carefully in order to raise seed capital and grow their startup. First and foremost, leaders should be prepared before meeting with prospective investors, and have a list of references who will back the idea.

Founders should get creative with funding, always willing to put themselves out there beyond a comfortable limit. 

What Is Seed Capital?

Seed capital rounds differ from proceeding rounds quite significantly. More than a few players are involved, as multiple funds invest an average of $200 to $700K each.

In addition, there are usually a few individual angel investors who invest more than just financially in the company. Angel investors usually get to know the founders and have an interest in the business that transcends the necessary belief in a high return on investment (ROI).

Some distinguished angel investors include serial entrepreneurs and former CEOs who have a track record of bringing businesses public. 

The seed stage “plants the seed” for a startup to thrive, in order to launch business operations and show revenue data for the next rounds of funding.

Above All, Be Prepared

Business leaders need to have specified projections and hard numbers ready on demand for venture capitalists before diving head-first into the seed capital round.

A compelling business plan will include strength, weaknesses, opportunities and threats analysis (SWOT). Founders need to have a thorough understanding of how venture capitalists make investment decisions. 

Venture capitalists will need to know exactly how much funding a business will need and specific plans for allocating investment resources.

A detailed cost projection will need to be explained and defended. In order to uphold credibility and shield oneself from entering an unfair deal, founders should have a strong idea of how much of the business they are willing to give up.

They should also have a clear concept of the interests and goals of the investors, and an understanding of the capital structure of proposed funding.

Many upside provisions are confusing and if not understood can prevent founders from realizing future profits. 

Everything should be based on hard numbers that give best-case and worst-case ROI scenarios to founders.

The numbers will ultimately drive negotiations for the VC's percentage stock ownership.

Rob Go, partner at Next View Ventures, a seed stage investment firm, recommends on the company website that leaders develop a list of supporters prior to meeting with venture capitalists. Founders should identify references and make sure that they are on board, understand the business idea and know what to say when questioned by investors. 

Gather Committed Investors

Wait, isn't winning over investors what seed capital rounds are all about? Yes; however, this will be easier if businesses have established themselves prior to seed fundraising. Human psychology has shown time and time again that if someone else already went through the decision process, another will be more comfortable in making the same decision.

No one wants to be the first one to take a risk, even risk-loving venture capitalists. Founders should solidify investor commitments.

This way, when prospective investors make contact, the committed angels can confirm their decision to invest X amount in the startup.

Founders may strategically shoot for relatively small commitments, around $20-$50K.

They should also consider giving reasonable provisions on these promises, such as “provided that the funding round is at least X and reasonable terms are met.” This will make early investors more willing to negotiate, given the downside protection. 

Put Yourself Out There

If a founder doesn’t have mentors and angel investors as contacts, they cannot be afraid to get out there and go to the VC community directly.

Networking is the most essential tool and skill that an entrepreneur needs, ahead of business acumen.

Gagan Biyani, the co-founder of Udemy, a platform for online courses, told his story of seed funding wherein he was initially rejected by over 30 top investors. He wrote on the Udemy blog: “I went to every conference I could and literally killed myself while there.

I attending tons of networking events and met as many entrepreneurs and investors as I could."

Startup mentorship programs and incubator firms are open for applications. Y Combinator and TechStars are two well-known programs that churn out a mass of successful startups.

Many programs choose applications that receive on-premise coaching and a small investment to get the businesses off the ground, in turn for a percentage of equity ownership.

Ways to Plant Seeds

In the technology age, it's easier than ever to reach angels, who enjoy using social media channels and interacting with enthusiastic entrepreneurs.

Many lesser-known VC firms focus on local entrepreneurship funding, in counties and communities outside big startup hubs like San Francisco and New York.

Additionally, founders may consider the newly popularized crowdfunding method for raising seed capital. Kickstart.com and many others now act as a platform to match investors and startups.

The Jumpstart Our Business Startups Act, or JOBS Act of 2012, lifted restrictions on investing in early-stage companies so that the common person could have the opportunity to invest.

Companies that aim to raise less than $1 million in total capital can do business with aspiring investors.

source: investopedia