How To Raise A $1M Seed Round(techcrunch.com)
techcrunch.com
How To Raise A $1M Seed Round
http://techcrunch.com/2012/05/13/how-to-raise-1m-seed-round/
16 comments
I raised my first round without knowing any VCs, and it took a long time while talking to dozens of VCs. I will give some perspective of someone who made it through the gauntlet:
First, it requires considerable persistence (and obnoxiousness) to get meetings with dozens of VCs if you do not know them. I did not have that level of obnoxiousness, I worked with someone that did. This is a significant barrier.
Second, if you actually have a hardcore technology startup, you are essentially screwed. Only a few VCs will consider investing in significantly new technology. Despite what they say, there are only a minority of VCs worth talking to that will invest in fundamentally new technology despite the marketing. On the other hand, those VCs that do are quality VCs in most regards.
Third, if you lack the connections then bootstrapping is a very good option if at all possible. The further along you are, the greater the options available. Even if it seems more difficult in the short-term, it is usually less difficult in the long-term.
As a broader observation, from what little I've seen most startup pitches fail because they are horrible, both at the pitch level and idea level. My pitch was horrible but my mastery of a compelling idea enabled me to find VC funding.
First, it requires considerable persistence (and obnoxiousness) to get meetings with dozens of VCs if you do not know them. I did not have that level of obnoxiousness, I worked with someone that did. This is a significant barrier.
Second, if you actually have a hardcore technology startup, you are essentially screwed. Only a few VCs will consider investing in significantly new technology. Despite what they say, there are only a minority of VCs worth talking to that will invest in fundamentally new technology despite the marketing. On the other hand, those VCs that do are quality VCs in most regards.
Third, if you lack the connections then bootstrapping is a very good option if at all possible. The further along you are, the greater the options available. Even if it seems more difficult in the short-term, it is usually less difficult in the long-term.
As a broader observation, from what little I've seen most startup pitches fail because they are horrible, both at the pitch level and idea level. My pitch was horrible but my mastery of a compelling idea enabled me to find VC funding.
Fair point. But as someone who went to 3/4 of these meetings with the author, I can say with some certainty that the 120 number is an exaggeration. Total intros was probably in the 40s, and total calls and meetings were maybe 20. We ended up with around 10 new investors in the last round.
Batting 1000 (4 investments from 4 intros) is unique. If your product and pitch is that good, then congrats! I think for most startups with good performance metrics, expecting 1/5 of your pitches to convert is a good benchmark.
Batting 1000 (4 investments from 4 intros) is unique. If your product and pitch is that good, then congrats! I think for most startups with good performance metrics, expecting 1/5 of your pitches to convert is a good benchmark.
tomasien, the thing is you are not two MBA's working primarily on pushing the business forward, while they only have someone technical 'lined up at the start of our raise...but he was not full-time when we were going around and making our pitches.' (my emphasis)
Because in that kind of situation, it's a lot easier to see how they would get 120 introductions.
Incidentally, on the amount raised: I think 500,000 would be more reasonable, but remember that they ended up with about 10 investors. Perhaps one or several of these investors had a standard of how much they wanted to invest, which pushed the total this high.
In fact, given the fact that they're two MBA's needing to purchase ALL their technical work, I would say that a million dollars (or close to it) is, well, something they'll need. Not to say it can't be done with less, but it is pretty easy to imagine how they can spend the money, and in their situation it's probably healthy to invest in enough hard, practical, shipping CTO-type people to dilute the 'idea pool'. Look at what happened with the guy who was hired with two business guys: http://news.ycombinator.com/item?id=3966301
The poster said: "Out of 3 founders, none is technical" and "During meetings, I always feel like a killjoy by attempting to be realistic and focused and reserved about the brand new idea they come up with every other week and that I need to get started on right when the meeting ends."
And someone else responded: "Three founders and one engineer that creates products?
Move on as fast as you can. Is not that you can't partner with some idea guy but three of them is too unbalanced. Doing anything takes an enormous amount of work, you can't change the idea every week(well, yes you can if you can reuse what you had already done, or if changing means less work or satisfying your customers much better, but usually you should not)."
I thought that was a particularly great point in that thread! So, in order to avoid this "unbalance", these two MBA's really need a sizeable tech team to dilute the 'idea pool'.
To me, the amount raised is MAYBE 2x-2.5x what they need given that they're two MBA's. Honestly, this is not a crazy cushion if there are unexpected setbacks or if they just want to make a sizeable investment up-front in content, etc, so they can prove their business model for a Series-A, make good, big sales, etc all off of this seed-round.
They downplay their previous startup experience, but perhaps it was enough to convince investors that they know how to spend this seed money effectively.
Because in that kind of situation, it's a lot easier to see how they would get 120 introductions.
Incidentally, on the amount raised: I think 500,000 would be more reasonable, but remember that they ended up with about 10 investors. Perhaps one or several of these investors had a standard of how much they wanted to invest, which pushed the total this high.
In fact, given the fact that they're two MBA's needing to purchase ALL their technical work, I would say that a million dollars (or close to it) is, well, something they'll need. Not to say it can't be done with less, but it is pretty easy to imagine how they can spend the money, and in their situation it's probably healthy to invest in enough hard, practical, shipping CTO-type people to dilute the 'idea pool'. Look at what happened with the guy who was hired with two business guys: http://news.ycombinator.com/item?id=3966301
The poster said: "Out of 3 founders, none is technical" and "During meetings, I always feel like a killjoy by attempting to be realistic and focused and reserved about the brand new idea they come up with every other week and that I need to get started on right when the meeting ends."
And someone else responded: "Three founders and one engineer that creates products?
Move on as fast as you can. Is not that you can't partner with some idea guy but three of them is too unbalanced. Doing anything takes an enormous amount of work, you can't change the idea every week(well, yes you can if you can reuse what you had already done, or if changing means less work or satisfying your customers much better, but usually you should not)."
I thought that was a particularly great point in that thread! So, in order to avoid this "unbalance", these two MBA's really need a sizeable tech team to dilute the 'idea pool'.
To me, the amount raised is MAYBE 2x-2.5x what they need given that they're two MBA's. Honestly, this is not a crazy cushion if there are unexpected setbacks or if they just want to make a sizeable investment up-front in content, etc, so they can prove their business model for a Series-A, make good, big sales, etc all off of this seed-round.
They downplay their previous startup experience, but perhaps it was enough to convince investors that they know how to spend this seed money effectively.
We are a tiny startup in India. I am a techie myself and have failed twice in sustaining business (teams of 12 members both times). We have failed getting into YC but have never lost hope. We will apply again, our product is nearing MVP.
The biggest thing is to keep fighting. Being a techie helps in reducing your initial costs. There are other things you can do. We, for instance, got our product sponsored hosting from SoftLayer (thanks to them). We are also going to ask RackSpace to sponsor us once we start closed beta. We keep in touch with everyone around and people in the Valley. We are very far away but we have ambitions and experience.
We read a lot of very detailed battle stories and get extremely inspired. That is I believe the spirit. There is more competition than there ever was, and I have myself been watching (and failing) for about 6 years now. The important thing to remember: it is NOT EASY, face it, continue doing what you want to do.
The biggest thing is to keep fighting. Being a techie helps in reducing your initial costs. There are other things you can do. We, for instance, got our product sponsored hosting from SoftLayer (thanks to them). We are also going to ask RackSpace to sponsor us once we start closed beta. We keep in touch with everyone around and people in the Valley. We are very far away but we have ambitions and experience.
We read a lot of very detailed battle stories and get extremely inspired. That is I believe the spirit. There is more competition than there ever was, and I have myself been watching (and failing) for about 6 years now. The important thing to remember: it is NOT EASY, face it, continue doing what you want to do.
How do you get sponsored hosting?
We looked around at many hosting providers who are sponsoring companies from incubators like YC, TechStars, 500, etc.
Then we approached and connected with RackSpace and SoftLayer (through LinkedIn). We explained our concept and got sponsored from SoftLayer. We will approach RackSpace with details too.
Then we approached and connected with RackSpace and SoftLayer (through LinkedIn). We explained our concept and got sponsored from SoftLayer. We will approach RackSpace with details too.
I agree 100%. The struggle is far more common in startups than most valley publications portray it to be. If you're B2B, you need customers. If you're B2C, you need users. Just put your head down and keep working.
That sucks man, to hear about your startups. Is there no funding available in India ? I hear there are some angel groups in Mumbai.
Don't think of YC as the only option. Many seem to on HackerNews. Consider alternative accelerators before waiting 9 months hoping for YC. There's also seed funding, YC is one if many paths, it may be the best accelerator. I think once you have a product you're happy with wasting time hoping for YC isn't helpful to you or your company.
>> "The Slide that Made the Difference Between Getting Funding/Not Getting Funding"
Was their CAC model really the slide that made the difference? The basis of the model depends on finger in the air assumptions. It shows they considered how they will convert leads but how to they validate these assumptions?
>> "If you can convey to VCs that you have a repeatable business model, and understand the microeconomics of your business, then you are golden."
I suspect this implies the business should be able to make money?
Was their CAC model really the slide that made the difference? The basis of the model depends on finger in the air assumptions. It shows they considered how they will convert leads but how to they validate these assumptions?
>> "If you can convey to VCs that you have a repeatable business model, and understand the microeconomics of your business, then you are golden."
I suspect this implies the business should be able to make money?
Actually understanding those numbers is kind of like product development: you would think it is table stakes, but a surprising number of startups completely fail at it, so FizzBuzz tests like "Can you ship anything?" and "Can you invest $1,000 and have at least $1,000 of revenue?" actually provide useful signal.
"Shipping a product; customers use it; at least one customer acquisition channel works in principle" is actually fairly fall along on the derisking/valuation/etc timeline.
"Shipping a product; customers use it; at least one customer acquisition channel works in principle" is actually fairly fall along on the derisking/valuation/etc timeline.
Even among well-funded startups, having a usefully specific definition of the target customer and where you fall in relation to their existing value structure is something of an accomplishment.
I belive traction is #1. Traction will give you intros and everything else you need to raise money. By the way, the fact of getting into YC is one example of traction.
>the fact of getting into YC is one example of traction
social proof
social proof
what? an insightful article on techcrunch? oh wait, it's a guest writer. whatup sunil!
Holy. Shit. I've had maybe 4 in the year since I started out, and I've raised money from all 4. 120? Obviously all the points they make are GREAT, I really do like this article, but there are lots of people with good products, pitches, revenues, etc. and they can't raise $1mm because they don't know 120 investors.
Am I wrong? Does everyone have a network of a 120 investors?