This is a co-authored post with Jorge Goncalves, who is also a lawyer and the co-founder, and CEO of 4YouSee Arenas. We offer some perspectives and tips on how entrepreneurs may improve their chances of raising a seed round.
You can read more about Jorge and 4YouSee Arenas, at the bottom of this post.
Who are you? What does it mean to be an Entrepreneur?
You are the entrepreneur and the ultimate decision-maker at this stage. Whether you and your startup do well or not is up to you. Own the situation. You are expected to be at ease with coping with uncertainty (things that you just don’t know). To demonstrate resilience and grit in the face of adversity.
When you are a founder, you are (or should be) experimenting/creating every day. You should have a precise destination in mind (even if it ends up being the wrong place).
You are expected to be granular = do things that do not scale, and take advantage of all opportunities to benefit from economies of scale. Identify and always be on the outlook for all possible network effects. Keep track of your current and potential competitors. Create compelling value (do something better than your competitors). Create and build upon an entry barrier. Focus on your uniqueness. Be adaptive. Have a growth mindset. Be coachable.
What you Need:
TEAM AND CULTURE
In terms of the team, investors will look at their skills and expertise and favor a mix of complementary expertise that is relevant to the problem that the company is solving.
Culture is incredibly important for any company in the world. Culture is who you are as a company, and essential for seed-stage startups. The reason is simple, even if you do not have a big team or there are just founders working, culture is created from day 1! This defines who you are and what you stand for.
Investors will look at the culture that you are building within your startup and this is also a key aspect when it comes to your hirings. Employees will see your culture as one of the main points for them to establish an identification with the company and its purpose. Do not expect to have long-lasting employees or customers if you do not reward or recognize their efforts. Clearly, your culture will evolve throughout time but try to make it right from the beginning. Usually, one of the most praised aspects is how you place people – employees and customers – first. How to build culture through ‘effectuation’?.
A REALLY BIG PROBLEM – MARKET OPPORTUNITY
If the problem is big enough, the Total Addressable Market (TAM), will probably be large too, so there will possibly be a compelling long-term exit opportunity for the investors.
You should know the problem (and be able to show that you know more about such a problem than your potential investors) and really be interested in solving it (not just doing it for the sake of expecting to make money).
You should constantly scrutinize and study the market. You need to be sure that there is a need for the solution, a place where your product can fit, or both. Even if there is no express want. You need to understand how people will use it if they are willing to pay for it, why, and how much they’re willing to pay. You need to find out how and when to talk to them better, what way of communication is more compelling for them, and what is their pain (even if your potential clients can not describe it).
You need to find out how your product will differentiate (your unique selling proposition) from other products in your niche (and you’d better choose a niche, a definite and clear purpose for your product) — which means that you have to study your potential competitor’s products and their value proposition and figure out their way of communication.
Before you go asking for money (even if you desperately need the money), you should have gained some proof that your product is needed. What do we mean by “needed”?
- Solve problems in a meaningful way.
- Make actions less painful.
- Reduce friction.
- Simplify processes.
- Add value.
How do you prove that your product is needed?. Do it through user research with your prototype or MVP. It’s better not to rely too much on FFF (family, friends & fools), but to go out to your audience and ask them. Don’t be afraid to show work in progress, as long as it minimally works. This will help you get evidence for your investors that your future customers really want your product. It will also help you gain new insights into how your audience thinks. Sometimes, one conversation is more efficient for shaping your product and value proposition, than hours of scrolling through reports: Planning Startup Strategy: Customers First, VCs Later
TRACTION AND TIMING
Investors are looking for some proof that your team can execute. Show investors that you have numbers or data proving that customers are excited about your product. This could be revenue, monthly active users, sign-ups, or any other metric. The most powerful metric is when a customer takes money out of their wallet to pay for your product. Depending on your business it may not be easy to get revenue early on and you may have to show a leading metric like sign-ups or activity on your website.
In terms of timing, investors are trying to figure out if the timing of your business aligns with broader trends (not too early, not too late).
Additional Value-Adding Factors
Investors get excited when they feel like your startup is attracting positive attention from people in the industry. This could come in the form of top advisors being involved, a talented person joining your team, a celebrity endorsement, or even an article in a major publication.
Understand that if you are a first-time founder with very little traction, the most likely investors are the people who know you best. Friends, family, past colleagues. With only a few months of operating history, those are the people who are the most likely to bet on you rather than betting on the company.
If there is one thing that all investors know is that your financial projections will not be accurate, perhaps you will be capable of generating more revenue or maybe not that much. Nevertheless, you should focus on your finances, especially concerning the cost structure and the per-unit cost. There are some investors that may not see the projected revenue as vital, but they surely will want to see your cost structure.
Nowadays with the startup hype, there are multiple VCs and entrepreneurs adopting a vision of ”we must spend cash in order to speed up” (or blitzscaling). Well, this may be true in multiple cases, but sure is not during your seed stage.
So our tip is, to focus on your cost structure and try to make it as lean and efficient as possible, of course without sacrificing the productivity of the company. If you keep it lean, you will be able to demonstrate that you can spend money if you wish, but only on what really matters for the purpose and goal of the company.
Investors want to be sure your startup won’t break in a few months due to a lack of leadership, time, and operation management. They want to know you have an efficient way to monetize your product and the step-by-step path of implementing this way is documented and backed with KPIs and realistic estimates. It’s also better if you know the marketing strategy for your product beforehand: if you know how to promote your product and there is evidence your methods are compelling for your audience (again – gain them through research), you have a better chance to get funding.
CHOOSE FUNDING FIRMS – SELECT YOUR PARTNER
This is a point a lot of startups miss. When you’re choosing an investor or investment firm, it’s better to choose a partner with a deep knowledge of the industry you want to enter and with business/human values that resonate with you. Before pitching, study them like you’ve studied your customers, — and find out if they’ll be of help for you in your work: Know Your VCs: Before You Come to the Pitch Deck & Choose your investor carefully.
SIMPLE FUNDING TERMS
This may be a unanimous opinion: keep your funding terms simple at a seed round. There are usually two paths that investors follow during a seed-stage: Equity or Convertible Note.
It is essential that you do not overcomplicate with too many different classes of shares. Also, be aware of the benefits and privileges you may concede to your investors (preferences, etc.) since it is likely that future investors during your series A or B will also want them.
If the selected option is a convertible note, pay attention to the valuation cap that you propose since it will most likely set a floor for the price for your shares in the next round. Too high of a valuation may work against your chances of raising your future series A.
How to Approach Your Potential Investors?
Below is some advice on how to approach investors from Dimitry Gershenson, co-founder, and CEO of Enduring Planet, a company that offers non-dilutive capital at the growth stage for climate entrepreneurs. Click on the link in the tweet below 👇🏻
And some extra words from Dimitry about pitch decks – click on the link in the tweet below 👇🏻
Jorge Goncalves is a lawyer qualified in Brazil and Europe with experience in the sectors of Mining, Oil & Gas, Regulatory, and Technology. He has rendered consultancy for international companies in Europe, Latin America, and Africa. In 2020 he co-founded 4YouSee Arenas, a SportsTech based in Lisbon actively working on improving the commercial revenue of sports clubs, and the experience of fans, through a data-driven approach to their assets.
4YouSee Arenas‘ mission is to assist football clubs to fully comprehend their fan base as well as their media assets with the goal of increasing their commercial revenue. Using our data-driven approach, we conduct real-time advertising and sponsorship activations through the clubs’ most suitable media assets. Our motto is: Understand it, Communicate it, Analyze it.
“Money is the seed of money, and the first guinea is sometimes more difficult to acquire than the second million.”Jean-Jacques Rousseau