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Seed Funding for Startups: How to raise venture capital as an entrepreneur

Jan 8, 2019
Caya

Raising money is hard. It's so hard most companies fail at it.

In this article, we'll look into traction requirements, pitch decks, alternative funding sources and on how to find investors. This is seed funding for startups.

I'm the CEO of a company called Slidebean, and thousands of startups have used our platform to create their pitch decks. Their success is our success, and this is why we get involved with them and have learned a thing or to about what works, and what doesn't.

I started my first company in 2011, and I failed at raising capital. I know the pain of shutting down a website you spent countless hours on, and having to email all your customers to say it's game over.

The problem with my first company is that we spent too much time trying to find investors, hence we failed to notice some of the fundamental flaws in our product.

For Slidebean, we raised a seed round of $800,000 which has allowed us to grow to a team of 25, increase our revenue to seven digits and become profitable in the process. And yeah, it was hard.
I'm telling you this because I want you to trust my advice. I tried and failed, and I can look back and see why I got a 'NO' from most of the 142 investors I pitched. Yeah, 142 to raise $800,000.

Business Traction

So let's talk about traction, first.
I have this problem with startup press (but we love YOU, @jordanrcrook). It gives new founders a false notion of how fundraising works. You read the story of Yo, an app that just sent notifications saying 'Yo' and how they raised a $1,000,000 seed round, and you assume that's something anyone with a couple of lines of code can do.

Most companies raise money AFTER getting traction. Very few companies raise money with just a prototype and no users, and certainly, NO company raises money without a fully formed founding team.

The most extreme case here is tech companies that are trying to raise money to hire a CTO. This makes no sense. Tech talent is expensive, and it's scarce, and the first proof that your company is worth something is that you managed to find a full stack developer that would turn down a job at Google to work on this idea. As a CEO, you need to be able to find and convince that guy, who joins your company for the stock and not for the salary; when he could be making $150,000/yr otherwise.

The reality of startup fundraising today, at least in Silicon Valley and New York, is that companies are pitching investors with traction, excellent traction.

Traction usually comes in the form of revenue: tens of thousands of dollars per month, growing over +20% month-over-month. I'm not making this up, check this article by VC Elizabeth Yin. Pure play, no-revenue traction counts only when you are dealing with millions of users and fantastic retention rates.

So how can you get to these numbers if you don't have any money to start with? Yeah well, bootstrapping.

Bootstrapping

We bought our domain in 2013 and started working on our product, but it was only after 18 months that we managed to get any decent money to ramp up growth. It was $100,000 from the 500 Startups program, but we'll talk about accelerators in a minute.

From May 2013 through October 2014 we bootstrapped. We did part-time consulting so we could pay our bills. We had a $1,000 salary each, and we shared an apartment. It was barely enough, but the backgrounds of the three founders made up for all the talent we needed: no need to hire anyone. Our company burn rate was probably $3,500 including our 'salaries' and the services we needed.

It sucked; but if you can live on a budget and put up with your co-founders while having no idea what's going to happen, you've passed a very tough test.

Startup Accelerators

I've been through too many startup accelerators, more than I like to accept.

It was a program called Startup Chile that allowed us to drop consulting and finally dedicate 100% of our time to the product. Startup Chile provides +200 startups a year with a $35,000 government grant, no equity in exchange. All you need to do is move down to Chile for six months, and get involved with the local startup community.


It's insane if you think about it, free money! And it might be all the capital you need to finish and launch your product and start generating revenue.  We did it, we actually moved to Santiago, and this is where we launched our first beta and signed up our first few thousand customers.

Thanks to the traction we got there we eventually got accepted by 500 Startups, which then provided $100,000 in funding, plus it allowed us to move to Silicon Valley for a few months.

High end, top tier accelerators like 500, YCombinator, TechStars, and DreamIt provide you with so much more than just cash: office space, advice, a community of brilliant people to bounce ideas with and more importantly, validation.

The process to get in is hard and extremely selective, but again, it's a fantastic validation of the potential of your business. Check out this link for more info on how to get into an accelerator.  There are hundreds of lesser-known accelerators, and they certainly provide less value or less funding, but for many of us, they are the crash courses and boost we need to get to a fundable point.


THE PITCH DECK

Once you feel ready to raise money, and hopefully you have the traction you need, you need to come up with a pitch deck.

DO NOT reinvent the wheel. There is the standard pitch deck template most investors expect. You can check our presentation section and download the one that suits you. We've also prepared an in-depth video, breaking down every single slide and giving you insights on how to complete them. Check that out.

THE KEY POINTS ARE THAT:

  • -Simple is better, again, don't get creative and don't make it longer than 15 slides.
  • Don't overcrowd your slides. If it doesn't fit, then it probably shouldn't go on the deck.
  • Your pitch deck is an intro to your company and more importantly, the story of your company and the founders. Don't get into advanced tech details or wild revenue projections; save those for the follow-up meetings.
  • Most investors take about 4 minutes to review a deck they got over email, and if it's longer than that, chances are they will skip it, so no point adding it anyway!


Another common mistake is treating your pitch deck like a state secret. No investor on the planet will sign an NDA for the chance to see a pitch deck- it's a rookie move that will probably burn that connection for you. These guys look at hundreds of decks a year, and the liability of signing NDAs for each one of them is just not worth it.

Don't get upset with this, but ideas are worthless without execution: it's your ability to execute that matters. If anyone seeing your pitch deck can go on and start a clone company and beat you to market it, then it might not be a great idea to begin with.

START YOUR PITCH DECK


FINDING INVESTORS

I heard at 500 Startups that you need to pitch 100 investors for every $500K you want to raise. At least in our case, the math held up. Getting in touch with 100 investors is no easy task, but the point here is don't expect that you'll get funded by the first, second, third or tenth investor you speak to. You need to get in front of many, many more.

The first thing to know is which type of investor you are targeting. My experience and my advice relates to VCs and Angel Investors, which are normally interested in tech, high growth, high scale companies. These guys look for companies that can raise $1MM or so as a seed round; and use that to get them to a $4-$5MM Series A stage in 18 to 24 months. This means 3x annual growth and a huge market opportunity.

If you are building a more traditional business that can't sustain that sort of growth, you should aim for a different kind of investor. So first of all, leverage your LinkedIn network. Make sure you add everyone you know and tirelessly browse their connections. If you find a match:

  • Check that the investor is actively investing. You can use AngelList for that.
  • Ask for a warm intro. This will almost guarantee a chance to share your pitch deck- many investors just don't reply to cold emails.
  • Share your deck with a link (not a PDF file and NEVER a PPT), so you can track its activity, or remove access when needed.

Once you've depleted your LinkedIn contacts, start attending startup events and befriending people. Just talk to them, add each other up, and expand your network. If you play your cards well, you can eventually request an introduction. This is another point where accelerators are really, really useful. If you absolutely don't have a network, then that 5% or 7% that the program asks in exchange for their help, becomes much more valuable now because they will unlock those contacts for you.

We recently launched a (free) product called FounderHub as a branch of Slidebean. We connect founders with potentially interested angels and accelerators. We also have the contact information of thousands of investors that you can browse, filter and target, but remember, cold emails are the last resort.

MANAGING INVESTORS

You'll want to keep a spreadsheet and keep a log of every conversation and the status of your relationship; trust me, by the fifth conversation your brain will start mixing people up. You can go to FounderHub to download the template of the spreadsheet I used when we raised funding.

A TYPICAL INVESTOR FLOW GOES LIKE THIS:

  • Email intro.
  • Send Deck.
  • If there's interest, some follow up questions, maybe.
  • Get a meeting.
  • These meetings usually are 1 hour long. And they consist of a quick 10-15 minute pitch (using a variation of the pitch deck you sent before), followed by a Q&A session and discussion.

They will either destroy you, tell you that you are too early, or show obvious interest in investing. If you are destroyed, take it and go find the solution to the problems and the questions they asked. You are probably not getting another chance with them, so cross that out on your spreadsheet.

If you are too early, fine, take it. Ask them if they'd like to stay posted on your traction, they'll normally say yes. If this is what most investors are saying, they are probably right so stop wasting time with meetings and get back to your product traction.

If they agreed to stay posted, make sure that you email them every other month or so. It's valuable to keep the contact alive and active, they can maybe, maybe invest later or you can maybe, maybe request a LinkedIn intro from them.

IF THEY SAY YES

If you are still reading and if an investor said yes to you, you are part of the lucky 1% of startups that is actually able to raise seed capital. Congrats! When you have a lead investor, finding others is easier.
When an investor is interested, they'll probably ask about your terms. Seed rounds in the US are usually handled as convertible notes or SAFEs, stay away from equity rounds if you can. We can prepare another video explaining the differences between these, so let us know in the comments if that's something you'll like to see.

CREATE YOUR INVESTOR PITCH DECK
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