Raising a Seed Round — The Six Mistakes That You Should Avoid.
I tried to recall all the informations I read, heard and learned over the past years on Seed fundraising. What came out is these Six Mistakes that most founders do.
Mistake 1: Bragging before having traction
Two years ago I launched an e-commerce company and I made this one mistake that almost everyone makes: I wanted everyone to know that I was launching something.
This is the one mistake every entrepreneur makes. Now don’t get me wrong, I’m not saying that if you do, you won’t be successful. I’m not saying either that you shouldn’t talk at all about what you are doing.
You need to launch quietly, with 3–4 customers in the know, that believe in you. Once your product starts to show traction, that you start having inbound leads thanks to word of mouth, you will be the next hype startup. VCs will start thinking that someone else lead a round for you and that they are missing something. Now you created tension and you are definitely on a good path to your Seed round.
Mistake 2: Sending a random deck when you are a nobody
This is hard to hear, but if you don’t know them, VCs are not your friends. They aren’t here to give you money because they think you sound nice. They are in the business of minimizing their risks while maximizing their potential returns.
Why is that ?
Because they do not invest their own money. They are taking money from other big firms/families that we call Limited partners. After investing every dime they have, they will want to keep their job. LP’s will come asking for results and VCs need to have great numbers.
Now what does it have to do with you and your deck ?
Let’s say that you are launching a startup and that you don’t have much experience in the field. You didn’t go to the top-tier business/engineering schools and you don’t have a product yet. Chances are you will never get funded without any metrics to show. So do not send your deck to the first email address you found out there.
As I said in 1, focus on your product, launch a beta, give it out to some customers that you know and let them try the product for free. Once you start to have a good traction, ask entrepreneurs for referrals to the VCs that invested in their business.
Payfit did it when launching and you know the success it is now.
Mistake 3: Not taking care of your dilution/cap table
Here it is. Julia, a Seed VC is finally ok to meet with you, she seems interested by what you are offering. Before sending you a term sheet she wants to have a look at your cap table and… Drama! There are more names on your cap table than the VC has companies in her portofolio.
Huge problem. At Pre-Seed/love money/BA stage, you just can’t give more than 10–15% of your shares.
Why?
Because the Seed VC wants you to be a superstar and for believing in you he will take 15–25%. But, to be a superstar you will need to be diluted again through Serie-A/B/C… Exit/IPO.
Unfortunately for you, VCs know that you will not be at 100% motivation if you don’t own a minimum of equity in your startup. So don’t make that mistake.
If you still do, either you trust yourself and you buy out shareholders through debt/cash or you count on your VC to agree for a higher valuation AND cleaning your cap table. This is very unlikely: if you have a busy cap table you are already wrong.
Mistake 4: Having a fundraising attitude only when you need cash
Two ways of seeing things : you want to spend every second on your business and talk to VCs only when you need money OR You want to keep teasing VCs for the moment you will need cash.
My advice is start having a fund raising attitude when you don’t need any money. What people don’t tell you is that the first option can work but mostly for superstars. Plus, I think that you gain a lot of benefits by being transparent along the way.
Now, how do you maintain a positive tension?
You can start by enrolling them in your monthly/quarterly newsletter and keep them in touch with your progression: share your metrics! If you are doing bad, you can’t hide and there is only place for improvement! Plus, you would have never been funded anyway.
If you are doing good, VCs will contact you by FOMO and you will have the chance to experience a smooth fundraising round.
Mistake 5: Being careless about your data
This one is quiet obvious but you need to know where you are going: what is your TAM (Total Addressable Market)? Who will be your potential customers? How much will they pay for your solution? What is your business model? Will there be any space for upselling?
At later stage, VCs will ask you to give your Data Room to make the due diligence easier. Get your numbers in order early in the process. Even though you might be a young startup, you will start having customers and you need to get effective data on how your product is being used: using time, churn…
As you are still early stage it might no be relevant but if you can, try to get an idea of what your CAC/LTV (Customer Acquisition Cost/Life Time Value) will look like. For example if you are building a marketplace, try to see how much you are spending to get one customer paying for something (CAC) and if he comes back to buy again and how many times (LTV).
Mistake 6: Not knowing what you want
Why are you building a startup? What do you want? This might be the first question you need to ask yourself: do you want to build a nice family company that will lasts ? Do you have a long term vision and are ready to go to IPO? Or are you just an opportunist who wants to make quick money?
VCs will ask you the question, and you better not lie because they will see it. Be sure to marry someone who will have the same vision as you!
Would you have had something ? Please comment!
