How Do Startups Raise A Seed Round?
How is the seed round different from a Series A Round for startups?
What is a seed round?
Well, first off, a seed round is typically an investment in a startup that's either pre-revenue or post-revenue, but fairly early stage, usually within the first year of a startup's existence. They formed a company and they started talking to potential clients and actually collecting money, in most cases. A seed round is very early stage, usually the first year and it's a time in which the founding team says, "We need to raise money if we want to make this idea come to flourish."
Now that we know what a seed round is, by the way, usually between let's say 50,000 to a million dollars on average is a seed round for 99% of all startups out there. There's seven things you need to do, if you're a startup listen to this before you raise a seed round.
Number one, set up the proper entity. What is a proper entity? Well, when we say entity we mean a company, either a C-corp an inc rather, or an LLC. C-Corp or an LLC. Both have their advantages, that's a whole separate video that we've created at Angel Kings, which one is better. However, pick one and stick to it. You don't need multiple entities you should create one entity. We typically say, just to let you know, if you're trying to have a huge startup and you want to go which is what every startup should try to do, you should do a C-corp or an inc as apposed to an LLC. An LLC tends to be, an LLC is a limited liability corporation, it tends to take on just a handful of partners. If they issue K-1's, which are your year end statements of the profit loss and the distribution to certain partners. An inc is more of a grown up system to provide a different taxation mechanism, but that's what you'll see a publicly traded company, more often than not, is a C-corp or an ink, not an LLC. I say pick the inc, although we've got more advantages and disadvantages in other videos, but pick one.
Number two, be able to explain your product in one sentence. When people pitch Angel Kings and say, "Well, I've got this great idea. I want to do a car delivery for parents of kids, it's going to have the following three things." I say, "Look, step back. Tell me in one sentence what your product is and how you're going to make money." Frankly, the successful startups are always able to simplify and break it down in a way that eventually could be broken down the same way for the end consumer, the clients down the road. So, be able to explain it in one sentence. We provide car sharing options for parents who need help picking up their kids. That would be a simple one sentence, just an example for you. Make it simple.
Be able to explain your product in one sentence.
Three, prove you have some traction and people want to pay for your product. I hate it when startups come to me and say, "I've got this freemium model and I don't know when we're going to get paid, we just want to have tons of users just like Facebook or Instagram." Back up a second, reality is you're probably not going to be a Facebook, probably not going to be an Instagram. Maybe, but the reality is you've got to have some sort of traction, people want to pay for your product. Even if you were doing if from your model, which is total acceptable, we've invested in companies in that vein. Have you even talked to potential advertisers? How are people going to pay for your product and how are you going to make money, that's important. Even Facebook hired an ad exec, Eduardo Saverin, way before they took it to 100 million users, a billion plus users, and they knew how they were going to make money. Even Facebook is a freemium web sorts. Prove you've got some traction, too. Prove that you have users, they love your product, because if you're talking to a potential seed investor, an Angel investor, they're going to ask you that. What's your traction, what are your metrics? And if you don't have any, reality is they're probably not going to invest in you, unless they're a friend or family. Believe me, more often than not they won't.
Fourth thing is, provide a reasonable outline for your growth. What is reason? I absolutely can't stand it when I see financial statements where they say, "We're going to quadruple every year for five years and we're going to turn in..." You have to understand that market comps matter and that if you're building a financial services software tool or subscription tool, find a financial services subscription software tool that's similar to yours. See what their growth metrics are, see how much you can beat them, maybe 2 to 3 percent per month. That's big, but have a reasonable outline and not some ridiculous BS financial projections. We can see through the BS, we invest in companies with solid financials and reasonable outlines for growth here at Angel Kings.
Provide a reasonable outline for your startup's growth.
Fifth thing is, be able to explain what-ifs, what-ifs. Frankly, there are so many companies that start with a business plan, which arguably you never need, but they start with a business plan and say, "This is what we're going to do. Here's how we're going to do it. Here's the problem we're trying to solve. Here's how much money we're going to make per year. Here are partner, blah, blah, blah, blah." No. There has to be a level of reality that comes within your seed round raising money. Which is that shit happens. Things go wrong and you have to have a level of preparedness that everything might fail and you need to be ready. Ask yourself: what if my hypothesis is wrong, what are my conditions? How do we still make money and make our investors happy? You've got to be ready when an investor who is investing a seed round says, "Well, what if that doesn't work? Have you thought about this?" If you don't understand those contingencies you can fail and you won't be able to raise a seed round.
Sixth thing is, connect with friends and family first. Friends and family meaning your closest 50 friends or family, people that know you and tell them, "Look, I've been doing this for so long and now I'm ready to launch my own thing. I've got a vision for X industry with Y product." And be candid about the risk and reward that come with that. You don't want to destroy relationships and I think one of my mistakes in looking at startups has always been, well I'm connected I'm friends, I'm family I had to really set that aside and say I'm only investing in the company if I believe it has a billion dollar potential. If I don't think it could become a billion dollar plus company, at Angel Kings we don't want to invest in it. We want investors that have massive returns.
Explain what problem you've identified and how your product is going to solve it.
Number seven, build a slide deck. Create a slide deck that's less than ten pages, succinct and simple, which explains your vision and your mission, and most importantly what problem you've identified and how your product is going to solve it.
Those are the top seven things to do before you raise a seed round. At Angel Kings we are constantly looking for top startups, and I tell you what, if you don't have these or most of these, you're less likely to raise money. If you want to learn more, make sure to sign up for our course and reserve your spot today.