Is there any one here who has raised a significant sum in seed funding for their start up or is working in the VC space?
What do VCs typically look at before deicing on seed funding? How important are financials for raising seed funding? How much traction do VCs like to see for an MVP?
Any kind of detailed response from people who have successfully raised seed funds or have made such investments would be very helpful.
Bump.
Interested as well
Bump
I was once involved in raising a seed round so hopefully I can give you useful advice.
First, let’s be clear about two things so that you don’t misplace your focus:
1) Seed rounds are not about financials
2) Seed rounds are not about traction
Seriously. We raised a $ 1 M seed round and we had literally like 2 users so there were no financials or even traction to talk about. But that’s okay. A seed round is your experiment money. What you need to convince investors of is that your experiment is worth the price. How do you do this?
1) Focus on TAM: show your investors how big your market would be if your experiment was successful
2) Focus on the plan. The goal of a seed round is to reach a series A and for a series A you will need double digit growth sustained for a few months so what is your plan to get there?
3) Focus on the team. One question your investors will ask is if you are the right people to execute on the idea. Ask yourself that question about you and your team and see what the honest answer is. If your honest answer is no then in that plan you better have an item regarding hiring a rockstar COO/CFO/CTO that will turn that ‘no’ into a ‘yes’.
So in short you don’t need financials or traction. But what you do need is a thesis and an MVP. How developed should your MVP be? It should at least be robust enough to be able to prove your thesis. If you don’t even have that built then you are actually looking for a pre-seed round to build that MVP. For example, if you are AirBnB and your thesis is that normal people would want to list their properties in an app to get extra income then you at least better have enough built so that users can create an account and create basic listings. Nothing more and nothing less.
Thanks for the detailed response.
We do have an MVP and will finish developing it in a couple of weeks. We are also focusing on developing more complex features while we start pitching the product. Two of our members have successfully bootstrapped a start up before and one of us has founded a successful non profit (in a different geographical region however) so in terms of pedigree we can show that the team is experienced in bringing ideas to fruition.
Also another start up is doing something similar in a different geographical region (different continent) than ours and has already raised 500k in seed funding. I think that also validates our idea but not sure if that is something that we should mention in our pitch.
You sound like you are pretty well placed for a seed round so congrats.
Regarding mentioning that competitor these are my thoughts:
One time I did complete due diligence on a start-up that unironically claimed in its pitch deck that they had no real competitors. Not a single one. Their product was unique, sure, but it was also a pretty simple idea. There was no fucking way that there was not anyone out there who qualified as a direct competitor. Needless to say after digging (and digging a lot) I presented 3 competitors that had the exact same product and were ahead of them in terms of size and funding. And honestly this was the most negative part about their pitch. The fact that these supposed experts could not properly identify their competitors severely damaged their credibility.
But here is the thing. First-mover advantage is overrated. I don’t really care if you have 5 similar competitors. There will always be competitors. Even stuff like Uber had direct competitors, it is just that their product was superior. And speaking of Uber, there are now like 10 copycat apps all with billion dollar valuations. So there’s that too.
If I was you I would mention that competitor. First, it tells me you did your homework. But then you also have the chance to tell me what makes you different and better than them. 500k is peanuts. They could get all that funding but then crash and burn before their Series A. So I don’t care about them. In fact the odds tell us that they will crash and burn, so statistically why would I care? Now, if you tell me that you are a 100% rip-off of that other start-up then maybe I’d rather go and invest in their Series A so please put a lot of effort in your differentiators. You may think mentioning this hurts you but the reality is that your investors will find them in their due dilligence and then they will ask you that how come you did not find them if you are the supposed experts?
Thanks for the above.
In our competitive analysis slide we have mentioned them (lets call them Firm A) and during the pitch also mention how we are aiming to be better than them. There are other competitors as well but we are very much different from them. The main differentiator between us and Firm A is that their user experience in horrific in the sense that they expect their users to be super tech savvy. But as we thought they are currently working on this. Second is their underlying tech is a bit different from ours. While they are building their own blockchain we are using a public VC backed L2 blockchain solution to achieve the same thing at a fraction of cost to maintain and scale.
The thing is though since they picked their funding 6-8 months ago they are progressing at a much more rapid pace compared to our rag tag group on 3 guys working on our idea. This is also why we will be developing more complex functionalities to further differentiate us and show that despite having no resources we are developing something that a well funded start up still lags behind in.
Tbh, I was surprised with the funding amount they received and their progress given our MVP is as good as their finished product. But your post makes sense on how they managed to raise seed funding.
Second question if I may ask is what % equity did you have to give up for $1 mil. As per our funding plan we want to raise 150-200k for a 10% equity. This I think is still bold since we are claiming our start up is worth 1.5-2 mil $ without anything to show for.
I think the way you are handling it is perfectly reasonable. As for the competitors that are a bit different I suggest you don’t name names but have them as a bundle of competitors in your slide so that your investors know that you are aware of those other solutions but they have inferior tech/business model.
Regarding the more similar competitor yeah things are weird right now because the market is hot and there is a lot of dry powder. Even incomplete ideas can get funded with millions of dollars. The optimal VC strategy is to start fundraising the moment you have a functional MVP and decent pitch deck. They did that and got lucky getting investment easily and fast. It sounds like you have been at that stage for a long time but have not seriously pursued investors. I suggest you do that because even if you have a better team, if you want to overtake them you need cash to burn. Speaking of cash I think that 200k is too low. I don’t mean to assume anything about your financial situation but 200k is a single investment banker’s bonus. By that I mean that a single angel investor could probably write you a check for 200k and not even care about it.
In my case, the round gave away approximately 17% of equity. Remember that the purpose of a seed round is to get you to series A. Are 200k really enough to get you to that stage? Sounds a little underpriced but I suppose it depends on the industry and type of product. Just think about if 200k is really enough to get you to the next stage. You may need more.
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