01.30.18

How to Prove to Investors You’re Seed-Worthy

You may not know this, but there was once a time when tech companies made money by offering goods or services in exchange for tender, real money. But what most entrepreneurs have grown accustomed to is coming up with a brilliant techie idea for something new and shiny, telling some rich people about this idea, and then asking those rich people for a bunch of money. And it’s worked pretty well.

Since 2012, rich techie people have been tossing money at longshot ideas like Oprah tossing Pontiac G6 sedans at her audience members . It’s been fantastic for founders, and frankly, those in supporting industries (you’re welcome, lawyers). Founders have enough cash to turn their ‘great’ idea into a (sometimes) viable product for anywhere from 6-18 months before it crashes and burns.

With a 90% seed-stage failure rate, those rich techie people (in this article we’ll call them investors for the sake of brevity) are second guessing the ” spray and pray” approach, writing small checks to a large number of REALLY young companies, knowing full-well that almost all of those companies won’t even make it to the next round. Basically, they’ve been dumping cash into an incinerator, bowing their heads, joining hands with the LPs, and waiting for a founder messiah to emerge from the flames carrying the rest of the choking, soot-covered portfolio on their shoulders.

The investment landscape has shifted. They say Seed is the new Series A, and there’s a lot of data to back that up. According to PitchBook, the number of Seed deals from 2016 to 2017 dropped by almost 25%, even more so since 2015. Yet the overall amount of seed capital has remained steady, and even increased this year. This means individual seed rounds are closing with a lot more capital than they used to, “ Roughly two-thirds of the deals [in 2017] were between $1 million and $5 million,” compared to an average of $500k only a couple of years ago.

Early stage investors are now splitting their financial risks among a targeted few “seed-worthy” companies that can show they’re worth the risk. What this ultimately means is that it’s much more difficult to close your initial funding round than it used to be. Now, this isn’t necessarily a bad thing. Well, it’s bad for all those founders out there desperately peddling worthless equity for a quick half mil. But it’s good for the few focused entrepreneurs, the ones who aren’t waiting around for free money to scale their businesses. The ones who can figure out how to drive revenue right off the bat, track their metrics, and grow consistently month-over-month, all prior to seeking funding. These are the types of founders that will flourish in the new venture capital ecosystem.

 

“So how do I become seed-worthy?” – my cousin, Jackson

 

Traction… Traction, traction, and more traction. If you can show traction, with solid financial analysis and no bull****, that your company is growing its customer base, revenue, and awareness, month over month, you WILL close your seed round. Not only close the round, but close a nice, fat, juicy seed round with plenty of runway to reach the next milestone. The more runway you’ve got, the better chance at success. Investors know this (at least the good ones), which is why they’re doubling down on a few, and passing on the rest.

 

“But how do I get traction if I don’t have any capital to start out with?” – my cousin, Jackson 

 

My cousin, Jackson, is an aspiring entrepreneur currently working on his MBA. He’s a passionate, hard-working youngin’ with dogged drive, a bit of dev experience, and a level of focus that rivals Dory from Finding Nemo. Statistically, these attributes describe precisely 103% of startup founders. He’s got ideas, ambition, and a willingness to work his ass off to build a billion dollar business from the ground up – a recipe for success. But he still can’t figure out how to solve this chicken and egg problem: “To get traction, I need capital, I can’t get capital without traction.”

It’s true, there are definitely a large number of startups, based on what they’re building, that won’t be able to get their idea off the ground without some level of capital to get the product to market. This is especially true for hardware companies, practically impossible. If you’re starting a hardware company, my best advice is to fill out your Chapter 11 form now to save yourself the headache later. BUT, if you’re one of those ambitious types, I suppose there are a few ways to get there…

NUMBER ONE: There’s definitely a stigma in the tech community about crowdfunding. I’ve actually heard numerous investors say stupid crap like, “Oooh, a startup that’s had to resort to crowdfunding is a red flag for me.” Screw them. If crowdfunding your MVP gets you to a 50% MOM growth rate, the real investors will be chasing you like neighborhood kids trailing an ice cream truck (side note: don’t let your kids anywhere near an ice cream truck).

There are numerous types of crowdfunding platforms now. Obviously you can go to GoFundMe, Indiegogo, etc. But one of the most promising options for tech founders would be equity crowdfunding platforms like Seedinvest or Republic. Illegal before 2016, these are innovative alternatives to getting your company the pre-seed capital you need, AND you don’t have to spend $300k on legal fees trying to raise an ICO, only to find out that your underlying technology isn’t actually built on blockchain… bummer.

NUMBER TWO: Find an advisor. An experienced serial entrepreneur who’s grown bored after selling three startups to Microsoft for $100m a piece. Don’t ask them for investment, ask them for their wisdom… Also, use them as a bridge to powerful connections. Building your network of powerful connections will open doors for your startup that you never even considered. Finding one solid advisor can multiply your network and reel in closer relationships with other top-of-the-food-chain individuals, propelling you toward success on a wind of mutual interest.

NUMBER THREE: I hate to mention it, I really do, but incubators and accelerators really can be an important launch point. You’ll give up your soul to get in (5-7% for $25-50k is pretty standard), but many of these organizations have so many connections and rich support networks that, even if you only join one accelerator at the very, very beginning, it can set you up for long term success. Serious disclaimer: Do your research on the incubators you join. Find out the true value prop for joining. Weigh the value with what they’re asking of you. How badly do you need $25k? Don’t get fooled by future promises of exposing your company to their syndicate at a later date. Look at the fine print, evaluate, don’t screw yourself over!

I promise investors will deem you “seed-worthy” IF you can: get your product to market, chart some serious MOM growth, and do it by any means possible. Any investor who turns down a hockey-stick-curve company because of some stupid disposition about your methods for scrapping together the assets needed to achieve profitability is probably spending $36.99 a gallon on raw, unfiltered water.

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