David Cummings on Startups

What’s Required to Raise a Seed Round

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David Cummings

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As the cost to build a software prototype has plummeted over the past 10 years, the number of tech startups has grown dramatically. Only, the number of active venture capitalists has actually shrunk, and it’s still super expensive to scale a business as growth requires serious cash (see 5 Hidden Challenges with SaaS). After putting together a working product, it’s often time to raise a seed round in the $300,000-$500,000 range (see Death to the $700k Seed Round).

Here are a few thoughts on what’s required to raise a seed round:

  • Enough customers to prove product/market fit (often in the range of 10 to 50 paying customers)
  • $10,000 or more in annual recurring revenue
  • 3 reference customers that aren’t friendlies (e.g. customers that didn’t come from prior relationships)
  • Strong alignment and rapport between the entrepreneurs and angel investors

Raising a seed round outside of the major startup regions is hard but readily achievable with enough traction and market opportunity. Entrepreneurs that pitch an idea without serious progress will have a difficult time raising money.

What else? What are some other thoughts on what’s required to raise a seed round?

Comments

One response to “What’s Required to Raise a Seed Round”

  1. David Brown Avatar
    David Brown

    Nice Post David,

    A nice starter outline for entrepreneurs. One of the things that many entrepreneurs underestimate is the need/value of warm introductions to Angels/VC’s (depending on the dollars required for the initial raise). The vast majority of funding takes place via warm introductions to investors, it is the rare bird that makes a cold call to an investor that gets in the door and closes an investment. I agree that much of what you have listed above is spot on, especially your last bullet regarding the close alignment between the entrepreneur and investor.

    I would forward the idea that building those relationships upon starting the venture is as critical if not more than the other items and that telling potential investors what you’re going to do (per your steps above), then doing it creates the critical alignment you recommend.

    I tell entrepreneurs to tell investors something along the lines of this, day one.

    “I don’t want your money now. If I successfully do a, b and c (which we both agree we need to do first) can I count on your investment?” Many investors will not be willing to agree to a deal on the spot like that. What you’re doing is setting up your relationship with them based on success, doing what you say you’re going to do and that is what many investors bank on. In addition, most investors will like your aggressiveness/go getter attitude and I’m going to get this done.

    Like many things in the entrepreneurial world this tactic is harder than it looks. That being said, what investor could not help but be impressed by an entrepreneur that follows this strategy!

    Sincerely,

    David Brown
    CEO
    FundOurCommunity

    Reply

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