Most startups fail before making it through the seed stage.
Do they have to?
Seed-stage investors are always on the lookout for new and innovative startups to invest in. They want to invest.
Why is it then, that seed-stage investors say no to more than 90% of startups that come knocking? What is the critical difference between seed-stage success and failure?
Over the past 6 years in the startup world, I have worked primarily with seed-stage businesses. I had such a hard time determining what got these investors to break out the checkbook.
After working for a fund for the past year, the pieces finally clicked. Here are the aspects of seed-stage companies that make for successful raises:
Teachability
Most seed-stage investors have been through the startup cycle. Many of them miss it. Investing can become a way for them to dip their toe back into the exciting world of entrepreneurship. Seed-stage investors want to see if you have what it takes and how coachable you are. They will ask themselves, “can this person take our help?” If the answer is no, then they will move on.
This is a financial investment, but in many cases, it’s also a personal one. Embrace that. Let them give advice and admit that you have gaps that need to be filled.
Showing awareness of your obstacles is always better than denial. Let a seed-stage investor introduce you to people who will help you be successful. Use them as an ally. Create a relationship that goes beyond the financial.
Team Talent
Hiring sucks.
Finding good people is a huge barrier for any company, especially one with limited resources like a startup. A founding team that fills most of the most difficult talent gaps has a huge competitive advantage. This is one of the key things seed-stage investors look for.
Investors want to see that you have put a lot of thought into who is on your team and what their skills are. They also want to know that you can execute well given your current resources.
Show how well your team has done with the current setup. Have they been able to ship products on time and within budget? What have they been able to accomplish with the resources they currently have?
Building a strong team takes time and money. Having a team that comes ready for growth will help seed-stage investors be ready to take the leap.
Market Opportunity Data
The best thing you can possibly show investors is rock-solid financial performance. Most seed-stage startups don’t have that. The next best thing is marketed opportunity data.
The market opportunity is one of the most important factors that seed-stage investors look at. They want to make sure that there is a large enough market for your product or service.
This is generally called TAM (Total addressable market) and is best estimated by looking at the overall market size, then making a logical, data-based argument on why you believe you can take a profitable slice of that market.
A Good Story
The further you get into your funding rounds, the less this matters. At the start, it can be all that matters for some investors. Seed-stage investors want to see a good story.
They want to believe in you and your team. They want to feel like they’re backing the next big thing. Most importantly, they look for a mission that they want to be a part of.
Your job is to make them feel that way by telling them your story in an engaging, convincing way. Seed-stage investors are taking a risk when they invest, make them care.
A Best, Most Likely, and Worst-Case Financial Model
Seed-stage investors want to see a financial model that is realistic and achievable. Use the market opportunity data to make these assumptions. Ground them in math and data, not conjecture.
Start by showing your best-case scenario. This is what you hope to achieve with the investment. Next, show your most likely scenario. This is what you think will actually happen. Finally, show your worst-case scenario. Prove that even if your projections are way too liberal, there is still a path to profitability.
Make sure that your financial model is credible and has a clear path to profitability. Seed-stage investors are looking for businesses that can scale, so make sure you illustrate that in your financials.
Be prepared to back up your assumptions. Questions will be asked.
Commitment
A seed-stage investor is investing in you and your team. They want to make sure that you are fully committed to the mission and that you will do what it takes to be successful.
Founders who are working on their startup part-time are a huge red flag for investors. If you believe in your idea, burn the ships.
Taking the leap by diving in full time will show investors that you believe in your idea enough to risk everything for it. If you show this kind of commitment, chances are they will too.
A Pretty Pitch Deck
Yep, it matters. Solid businesses can be ruined by mediocre pitch decks.
Seed-stage investors see a lot of decks. After a while they all kind of blend together. Don’t let yours be just another in the crowd. Work to make them stand out, make sense, and be easily digestible.
Create a pitch deck that the investor can breeze through in 5 minutes and be able to tell a friend exactly what your business does.
A great pitch deck is a kind of like a great song. It is not annoying enough to demand your attention but really rewards you for it.
Your pitch deck should be smartly branded, concise, contain valuable data, and create a sense of legitimacy for your endeavor. Having a rock-solid pitch deck is worth the extra time and money it takes to create.
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Seed-stage startups don’t always have a rock-solid financial history. This puts the pressure on to compensate by creating excitement and confidence from potential investors.
A successful seed-stage raise takes equal parts charismatic story-driven passion and calculated data-driven assumptions. When this is partnered with a killer team it creates the kind of startup buzz that makes businesses impossible for investors to ignore.
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