Getting seed funding can be challenging for startups because they lack assets, have no records, and often have little to no product or user base. Usually, a big chunk of seed money goes to software and business development, leaving little returns for investors.
To get seed funding, you must justify the viability of your idea through proper planning and preferably a working prototype with market feedback. The potential investors expect you to prove your business concept before they decide to invest.
Here are the best practices for getting seed funding:
· Preparing your business model
Preparing a business model entails strategizing on how you will create continued value for your customers. Before you make a business model, you should know where your idea starts, how to progress, when to succeed, and how you will create value for your customers.
To prepare a business model, you need to follow some strategies
- Finding the best product/market fit
When developing a business model, you must find the best product that fits your market. Present the product to customers for testing and collect feedback on how to make it better.
It is crucial to determine the size of the market for your idea. Do thorough research to establish the level of competition and demand for your product/idea.
Before you enter the market, ensure that your value proposition aligns with the distribution channels and customer needs.
- Understanding the customer and the target market
Identify the target customer representing the people likely to benefit from your products. To determine your ideal customer, you can segment the market and then test your product based on that.
If you want to understand the customer and the target market, you must analyze your product, study the competition, choose the segment correctly, and conduct market research.
- Understand the potential size of the market
It is vital to familiarize yourself with the total number of potential buyers for your products and the total revenues you are likely to generate. You may define your market size based on the geographical location or by sector.
Determining size will help you estimate the profit you will earn from the business and the number of people to hire. Such earnings estimates will help potential investors to make informed decisions on whether to invest in your industry.
Being aware of the market’s potential size will help you know whether you are ready for a seed-stage round. If you have not built your MVP, it is essential to do it and get results to understand the prospective customers’ behaviors.
To actualize your MVP, present the product to customers and note how they behave with the commodity or service. If the product is complex, build your MVP through family and friends.
It is crucial to have a few people in your team to help you with validating the MVP and estimating the market size. Doing it alone is challenging, and it may take time to accomplish your goals.
- Preparing your pitch materials
Getting seed fund requires adequate preparations and supportive documents. Here is what you are supposed to do to prepare your pitch materials.
- Prepare a pitch deck
Preparing a pitch deck refers to putting your business plan in PowerPoint slides for ease of presentation to your potential investors. Seed funders need to get a quick synopsis of your concept ahead of the exhibition; therefore, avail it to them before the presentation.
When preparing your pitch deck, ensure that you use charts and other visual assets to communicate your ideas effectively.
Based on the Guy Kawasaki Pitch Deck Outline, a pitch deck should comply with the following.
It is advisable to use a maximum of ten slides when presenting your concepts to the investors. Under normal circumstances, it can be difficult for people to comprehend more than ten concepts in a single sitting.
Although a regular presentation takes about an hour, it is advisable to present your idea in twenty minutes and allocate the other time for preparation, questions, and discussion.
30 point font
A thirty-point font is adequate to cater to your audience’s interest. When preparing your pitch deck, bear in mind that some of your potential investors might find it difficult to read small font sizes.
Prepare a financial model with the use of funds.
To convince the investors about your idea’s viability, you need to prepare financial documents showing your revenue forecasts, operational expenses, and cash flow.
Have questions about business planning or the capital raising process? Contact our experts at Pro Business Plans by scheduling a free consultation.
Here is a summary of what your financial model should have.
Explain to your audience where your revenue will come from and its duration to generate it. You can project your income in five years and convince your investors what you will do to get it.
Under normal circumstances, operational expenses increase as the company grows. Demonstrate to your audience what will constitute your operating expenses and what you will do to achieve optimal costs. You need to explain how salaries, product costs, and overheads will vary your business’s growth.
Your cash flow projections should give clear details regarding how cash will flow in and out of your business. To convince the investors, you need to let them know that the projected cash flow is adequate to sustain business growth.
The executive summary should be done in a one-page document to highlight your business plan’s content. Ensure that you condense each key area of your business in one or two paragraphs to enable the investors to understand its content quickly.
Setting up a C Corp
Incorporating is a great way of maximizing revenues and protecting your business legally. Incorporation reduces tax liabilities, convincing venture capitalists to invest in your startup. If you are in need of service providers to setup your company, ranking websites such as Wimgo provide a variety of options.
Explain to your investors how you will convert your company into a C Corp and the different stock classes you will use to accomplish the conversion.
When presenting your pitch deck, bear in mind that investors rarely sign the NDAs documents and understand them that way. Depending on the nature of your business, determine the amount of funds to ask for. Note that most seed funds range between $1–3M.
Presenting a quality pitch deck will increase your chances of getting funded. Before you offer your pitch deck, allow professionals, such as editors and financial analysts, to scrutinize it.
Finding and pitching investors
For your startup to take off, you need to have a viable idea, an excellent pitch, and a quality investor. A good investor should be the one who is familiar with your business’ area of operation and who can advise you throughout your business’ growth.
Methods of Finding Investors
Consider using your existing relationships.
Contact your business associates, alumni networks, or your cofounders and let them know your business idea. You may also approach any university that has a strong network of investors from their faculty or alumni. Request them to connect you to their systems.
- If you don’t have relationships, establish an advisory team to help you get the right investor.
- Cold contact the investors
You can send cold emails to your prospective investors with a summary of your idea and how you intend to solve the problem. You can also use LinkedIn to connect to various investors through the investor list.
If you have contacted many investors but failed to get a positive response, find out if there is something you are not doing right. You may consult friends or any business expert for advice.
Negotiating with investors
Knowing how to negotiate with your investors will help you secure funding quickly. You should enter into the negotiating table with flexibility and an open mind. Funders are known to impose stringent conditions before investing, but your professional negotiations will make them soften their hard-line stance.
Seed round startup valuations
Determining how much money you need for your business and how much to delegate to future rounds is a crucial step towards your startup’s valuation. Knowing the value of your business is one of the vital requirements that funders consider before investing.
To build an effective pitch deck, you must consider the amount of capital your business requires, the proportion of the company you intend to sell, and the type of valuation you plan to use.
Note that your startup value’s primary determinants are the market forces and the investors’ willingness to pay a premium. If you want to get a better valuation, you must pitch your idea to many investors and get them interested in your startup.
The general rule of the thumb requires founders to sell 10% — 20% of their stake in the company. The simplest way to value your company is to multiply the amount of money you want by three.
You can value your startup based on your competitor’s history. For instance, you can analyze your nearest competitor and mirror their valuation.
Startups find it challenging to get seed funds for many reasons, such as lack of collateral and poor business track records. Fortunately, some investors are willing to fund them despite such challenges. To succeed in getting seed funding, you must prepare and present a compelling pitch deck to your potential investors.