One year ago, I founded PatentStatus, an intellectual property law venture, with some personal savings. We went from idea to launching of a product in less than 5 months and in our 6 month we secured our first two clients. It seemed that the world was our oyster and raising a seed capital round was the best way to accelerate our business forward. Over the course of six months, Imet withmore than two dozen angel investorsand pitched some ofIndiana's most established seed capital groups. I’d like to share with you both observations and advice from my effort and give you some insight into the experience for those of you who are considering this path.I successfully raised a low six-figure of capital, but it was just 25% of the total capital raise I believe I needed in my seed capital round.
First of all, congratulations on those of you who are entrepreneurs for pursuing your idea. Ideas are cheap, but you are taking action to move it forward. For that, I applaud you. But here’s the simple truth: every entrepreneur thinks his or her idea is the hottest thing ever. This passion is good, and investors respond to it, but they talk to a lot of entrepreneurs – and whether this is their hobby or a profession, investors are sitting on the side of the table because they’ve had some success financially to be willing to invest. Your passion will open doors, but it will not get you funding.
Before you start the seed capital process, you need to have people who are going to help you through the process. I don’t just mean your co-founders or team members, I mean advisors and peers who can give you frank, open advice throughout the process without any skin in the game.The team I compiled included: fellow tech entrepreneurs who I met through networking, a few former entrepreneurs who have had successful exists, an accountant who’s worked with startups and an attorney who deals in capital raising.
In my experience, Indiana investors do not invest in ideas – they are investing in businesses. Herein lies the first lesson, when it comes to raising seed capital, you should be past the paper napkin stage - and you are either in the process of bringing your idea to market or you’ve launched a minimum viable product. If you’re still in the idea stage and you need a little cash to prove your concept, raising funds in a friends and family round, or trading for services is a more appropriate path.
It’s critical to understand the role of seed capital. It is not to flush out your idea. Seed capital enables you prove your business model and your sales approach - and should accelerate your timelines and solidify your ability to go to market faster, better, stronger. It should be the funds that take you from concept to market at some form of scale.Seed capital is not to pay you to keep working on your idea. Investors who participate in seed capital know that there is a high probability of failure. They are looking for things that are more developed than an idea in the back of your head.
Investors who you interact will believe that youhave drank the Kool-aid – and you are confident of all of your assumptions (but that is all they are.) Which means, seed capital investors live and die by their risk tolerance. There are good odds your idea will fail – and if you don’t fail, there are excellent odds that the business you thought you had is not what you end up with. Where you see an endless opportunity, Investors hear little white lies and educated guesses posing as fact.
It’s important that you understand this because raising capital is extremely time consuming. Things do not move quickly. Building the list of prospective investors and getting meetings are the easy part. Every organization will ask for different resources. Each will have their own questions. Each operates on their own timeline. It took me 2 months to get my first check. It took me 4 to close my first ‘professional’ seed angel.Given this timeline, time works against you if you aren’t developing a sales pipeline and closing more deals.
You are going to be asked to create a lot of documents. Some of these are worth your time, most are not.There are only 4 documents you need to create at the beginning: A slide presentation deck of 10 slides. A pro-forma. A Term Sheet. And a two-page executive summary of your business. While there are a few exceptions, you do not need an NDA – you won’t get a meeting if you try. You do not need a PPM, yet…that will come when an investor agrees to terms.
Getting appointments with angels and seed groups is not hard – if you can make your pitch in an email as drop-dead-simple as possible. Each of the major groups have point persons who are the initial screening. If you have a developed network, you can leverage this for introductions. Groups like Gravity and Elevate Ventures are very open to making those early connections. Understand that their good intentions and interest in building an entrepreneurial community will give you a hand in getting some of their time. It does not mean, however, they like your business.
Your initial meeting is a first impression. It’s with the screening guy for the real screening committee….so no deals are going to come early. In this meeting they are there to make sure you are not a bozo.Don’t get caught with your pants down. You’ll want your 15 second pitch, your 10 slide deck and the executive summary for this meeting. You need to know every number inside and out in these documents. You need to know how you came to the assumption of certain terms and what led you to any conclusions you may. The initial screening meeting is the surest way to get disqualified from further consideration.
If you get through the screening, then it’s off to the shark tanks. Not all meetings are like what you see on TV. But don’t be mistaken, these folks are looking for details and any reason in the world to eliminate you as an option.
Investors want to know about your team and who’s behind you. They’re going to want to know what makes YOU uniquely qualified to lead the business.Ultimately, they’ll be investing in you – not your business.
They are going to want to know a lot about the market, what the buying factors are and how well you know your target market. They’re also going to want to see how you can prove that you can penetrate the marketplace with a viable product.
The single most important factor during the seed capital raising process is the continued growth and development of the sales funnel. How are you building leads and proving that what you are selling is working. More importantly, they are looking to see if the claims that you made previously are true and which were little white lies.
Because the number one question you will be asked throughout the process is “How many deals have you been closed.” They don’t care about how many meetings you have. They want to know about cash.
Getting the deal signed is going to involve a lot of vetting, many more conversations, and a lot of negotiation. Stick to your guns. The investor is looking for the best deal possible for themselves. They want to mitigate their risk as much as possible. They’ll want to ensure they have as much control as possible. Your earliest investors will set the tone for the follow-on investors.Rely on your advisory panel to work through these issues – and push them to push you.
Not getting the deal signed? Most people refuse to say no…and therefore they keep leading you along, and can’t just say no. Why, because people aren’t willing to tell you that you have an ugly baby. It could be ugly for a variety of reasons. You may be unqualified to lead the business – and they won’t invest in you. Or the business could be lifestyle in scope, not providing the right return. Or, they simply aren’t confident the marketplace you claim to exist really does. Your job Is to prove this to them – and also to yourself.
Buy this book. Build your network early. Ask for advice from others who have both succeeded and failed. Remember, the difference between dreamers and entrepreneurs are that we never give up.
Everything I learned about seed capital in 8 minutes
Everything ILearned AboutRaising SeedCapital in EightMinutes. James W. Burnes Founder @jamesburnes