Hello, everyone. This is Alejandro Cremades, and today we’re going to be talking about
How to Raise a Seed Round. Basically, what we’re going to be discussing is what is
a seed round? What are the different expectations, and some of the different things that founders
are going to need in place in order to get that money early-on? So, with that being said,
let’s get into it. The first part is to understand what a seed
round is. A seed round of financing is ultimately that first trench of money that the founder
or the company is bringing in from early-stage investors and it ends up being the first round
of financing that you raise as a founder. The goal of the seed round is to raise enough
money so that you can build the infrastructure and the key initial pillars of the business
in order to scale up. Typically, the amounts of money that you’re going to be raising
depends on your location. For example, on the East Coast or on the West Coast of the
U.S., I’m seeing seed rounds that go all the way up to 2 million. But, obviously, if
you’re outside of the U.S. and out of those startup hubs, probably you’re going to look
at less money. Again, it ranges from as little as 100,000 all the way up to 2 million, as
I was saying. The next part of understanding how to raise
a seed round of financing is to get what are going to be the expectations that the investor
is going to have when you go out there and when you try to raise this money. Essentially,
those expectations are going to be that you have already an 18-to-24-month roadmap, that
you have a founding team in place, that you have an idea on how you’re going to be building
and scaling your platform, and then also that you figured out how you’re going to get
to your customers and who your customers are. The next thing to understand is why a seed
round is so important. Just like other really great experts, like super-successful founders
like, for example, Reid Hoffman, who built LinkedIn and now is a venture capitalist,
they always say that the way that you raise money today is going to impact the way that
you can raise money tomorrow. So, for that reason, you want to make sure
that this very first round that you’re raising, you get the right people for the right reasons,
they’re aligned with your vision and your mission, and they’re going to be there sharing
the journey with you on the long run. The last thing that you want is to bring the wrong
people for the wrong reasons, and essentially, those could be catastrophic, and it’s going
to be super hard to divorce your investor. So, know that once you get that investor in,
and they’re part of your cap table, which is recording who owns what of the business
in terms of equity, you really want people that are going to send super-nice signals
to the market, people that can attract other people, and people that are going to make
it easier for you when you’re raising additional rounds of financing. In this case, it will
be the Series A round of financing, which is the next real financing cycle that happens
after the seed round. In terms of terms, you want to make sure that
you have the right terms. Once you already have an investor that is ready to come in
and to make an investment or perhaps that wants to negotiate with you what those terms
are going to look like, you really want to be clear as to how you’re going to be getting
that money in. You can either do it via equity, or you can do it via debt in the form of convertible
notes or safe notes. Typically, what I see is that in a seed round,
you want to maybe delay a little bit more, especially if you’re just dealing with individuals,
putting a price tag on the business, maybe you delay that to the Series A. A good way
to do that is via convertible notes, where people are giving you the money, and you are
promising them that those notes are going to convert into equity once you have a sophisticated
investor that is coming in and leaving your round on the Series A, where you literally
have venture capital firms coming in and establishing those terms.
Again, you can choose whether an equity round is right where you’re pricing the business,
where you’re putting a price tag that you negotiate with the investor, or perhaps maybe
the right round is to delay that process, and putting a structure, really, in the form
of a convertible note, which is a form of debt.
The next thing is understanding who you’re going to be pitching at a seed stage. When
you’re at the seed-financing cycle, you’re going to be either going after the angels,
you’re going to go after angel groups, or you’re going to go after venture capital
firms that are investing at an early stage. Now, you need to be very careful when you
go after venture capital firms on a seed stage because typically, the venture capital firms
that are coming in and investing at this stage in the game, those are institutions that are
putting very small ticket sizes. They’re putting $25,000 here; $25,000 there, so really
the spray-and-pray type of model. The problem with these types of institutions
is that as they come in, they give you the money – and you’ve got to remember that
here, you’re at the very early stages of building your business. If they give you the
money, and then, all of a sudden, the business model changes or you do a pivot, then they
perhaps may not reinvest in your next round of financing, let’s say the Series A.
That is problematic because then if they do not reinvest, that’s sending a negative
signal to the Series A potential investors that are going to be other venture firms,
and then they’re going to be like, “Hold on a second. They’re not reinvesting. Why
are they not reinvesting? Is there something wrong with the business?” So, you need to
be very, very careful because in many instances, getting a VC firm that comes in at a seed
round and puts an investment in your business, that could be catastrophic and perhaps lethal
if they don’t reinvest on the Series A. So, be very, very, very careful.
Again, like when you’re speaking with Angels, typically, the ticket sizes are going to be
anywhere between $25,000 to $50,000. You may have some angels, or may even super angels
that come in a little bit higher in the form of up to like $200,000 or $400,000. Then,
you have the angel groups where they’re grouping the investors and coming in and putting
investments all the way up to 2 million. In many cases, the angel groups lead the rounds,
so you may want to consider angel groups as a good way of financing your seed round.
The investor is going to want to see in terms of what they’re going to be expecting, in
terms of like materials, they’re going to want to see a pitch deck. You can see the
pitch deck template underneath this video. You’re going to also have to share with
them a financial model where you’re projecting, let’s say over the next three to five years,
the growth, the assumptions on the business, and so forth.
If they like what they see, then they’re going to give you a term sheet. Perhaps there
will be a due diligence process where you’re allocating and putting everything into a Dropbox
folder or a Google Drive folder, and you’re sharing that. Then, if they like that, you
go into either the convertible note purchase agreement or a form of a note, which is when
you’re doing a convertible note or signing their subscription agreement if you go for
an equity round. When it comes down to how you’re able to
get all the investors excited, in terms of how you do the strategy, it’s very simple.
You just do the research. You see which investors are actively investing in your segment, in
your location, and also in your financing cycle. And as we’re saying, in a seed round,
which is why you’re raising. You’re going to get founders of portfolio
companies that have received an investment in the last 6 to 12 months, and ultimately,
you use those founders to get the foot in. This is all about getting someone that has
that layer of social proof to get you into the circle of trust, to reduce the amount
of time from the first touchpoint to money in the bank.
Ultimately, as a result of using this strategy, you’re going to use the best source to get
you in. Those are founders again that are super incentivized to introduce you because
they’re going to need more money in the next 18 to 24 months, so by them introducing
you to their investors, they’re adding money to their investors. They’re going to need
more money, so by doing that, you’re making them look good, so use those founders to get
your foot in. Again, just go for advice. As the saying goes,
you go for money, you get advice, and you go for advice, and you get money twice. So,
just go for advice, and then when you have, let’s say out of 50 investors that you’re
engaging with, maybe one says, “I think this is interesting. Perhaps I’d like to
become a lead.” Then, at that point, you go to the other 49 investors and say, “We
just started a round. It’s going to close by x-date. We’d love to have you in. Let
me know if it makes sense to share the offering documents with you.”
That’s, essentially, how you’re creating that sense of urgency and how you’re creating
that fear of missing our because ultimately, you need to push everyone over the edge in
order to make it happen. With that being said, I hope that you liked
this video. Feel free to Like, and also to leave a comment, and to subscribe so that
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a look, and I think that you will enjoy it. With that being said, thank you so much for
watching. Bye. Bye.