The process of raising a seed round of VC financing has been compared to planting a tree, and for a good reason. It’s the first round of serious financing that your startup has ever raised, and getting this funding lined up will give you the capital that you need to hire the right team members, market test your ideas and develop a minimum viable product (MVP). If you raise the seed round properly, you’ll have enough capital for 12–15 months of future growth.
As a general rule of thumb, raising your seed round should take no more than six months. Of course, the Internet is filled with stories of entrepreneurs who have raised hundreds of thousands of dollars in a matter of days, if not hours. But guess what? Unless your company is guaranteed to be the next Google or next Uber, you can count on at least six months of tracking down investors, inviting them for meetings, going through the necessary due diligence process, and then responding to questions or concerns via follow-up meetings.
The amount of time required to raise a seed round depends on how many resources you can allocate to raising capital. Some entrepreneurs are so busy building, a company that they can only devote a few hours a week to raising a seed round. Others, however, might spend every single day talking to investors and walking them through the process. A lot depends on the overall quality of information that you can provide potential investors.
The conventional wisdom is that $500,000 is the minimum amount these days for a year’s worth of runway. Moreover, you should count on raising that $500,000 from a number of different investors. Depending on how large the round is going to be, most seed rounds tend to attract anywhere from 1 to 15 investors. Obviously, your life is going to be a lot less stressful if that number is closer to 1 than to 15. One common benchmark is that you should focus on raising at least $50,000 from every single investor — that would put you on pace to have about 10 investors in your $500K seed round.
From here on out, it’s just a matter of making enough cold email pitches to line up those 10 magical investors. According to some estimates, the open rate of cold email pitches to potential investors is less than 20 percent. So do the math — if you assume that 80 percent of your cold email pitches won’t ever be opened in the first place (a near guarantee if the subject email line is something like “NO-RISK INVESTMENT OPPORTUNITY OF THE CENTURY”), then you’ll need to send out 100 cold email pitches just to get 20 opens. And not everyone who opens your lovingly crafted email is going to want to invest.
Of course, a lot depends on the overall strength of your pitch as to whether or not VC investors will respond to you once they’ve opened your email and read it. You need to show immediate value right away — as in solid evidence of revenues and customers — or else there will likely be very little interest. They don’t care that you have an MBA, that you’ve started other companies, or that you are working with a top tech genius. All they care about is cashing out on their future investment.
So, doing a few back-of-the-envelope calculations, you can see that it might take more than 100 email pitches just to get a handful of meetings set up. Depending on the strength of your pitch, the quality of your data, and the general market conditions, you can count on approximately 20 percent of those initial meetings ending up as a verbal commitment to invest.
Based on these very basic calculations, you can see why it’s best to aim for a few deep-pocketed investors rather than a whole gaggle of shallow-pocketed investors. It makes your life much easier. Unless, of course, you enjoy the process of begging people for money…
There have been a lot of studies done about startup matriculation rates, which describes how many startups make it from one funding stage to the next. According to recent statistics, of every 100 startups that line up seed round financing, approximately 31 of them will go on to raise a Series A round. Put another way — you only have about a 30 percent chance of raising additional capital once you’ve raised your seed round, so you better make the best possible use of it!
There are a lot of ways to stack the deck in your favor. Two significant factors are early evidence of product market fit (i.e., there are people who want to buy your products), and monthly revenue rates of between $25,000 and $100,000 per month. If you can show both of these, guess what? You’re going to have much higher success rates of getting people to read your emails, pick up your calls, and meet you in person.
As a rule of thumb, prepare for a six-month journey when it comes to raising a seed round of capital. This will give you plenty of time to line up enough meetings and take care of all the due diligence required to reach that magical day when you wake up and find out cash has been wired into your bank account. From that day on, you should have enough cash to get you through the next 12 months. And, then, of course, the cycle starts all over again when you need to raise your next round…
Hey! I’m Tomer, an entrepreneur, and maker. You might know me from Mevee, Crane, and Shots, and now Slides among other products I’ve launched! This article is a part of a more extensive series I’m writing mostly based on my experiences and is mainly made of me and my team’s opinions.
I hope this helps you to avoid making the same mistakes I did, and remember to keep shipping!
This article is part of a series to help you with your startup launch and capital raise :
- How To Build a Pitch Deck
- How to Raise Venture Capital Money
- How to Launch A Successful Startup Business
- How To Value a Business
- Five Mistakes that Result in Pitches that Strike Out
- The Do’s and Don’ts for Pitch Decks
- How To Master the Art of the Elevator Pitch
- Watch Out For These Common Questions that Investors Ask
- Five Pitch Deck Design Tips
- What You Need To Know About Growth Hacking