Ultimate Guide to Seed Fundraising for Early Stage Tech Startups in 2018
Your startup money is often called “seed” capital in the technology industry. This article tries its best to convince you to bootstrap (self-fund) your tech startup at first, and it gives you a number of time-tested and proven methods for bootstrapping at the end of the article. However, to keep things balanced, this article also explains the venture capital / angel investor fundraising process and gives advice on how to raise your seed money. A smart move is to start out by self-funding and then seeking further investment when you have a proven track record or more to show for your startup idea. The fantasy of turning up with an idea and having investors fall in love with it will only ever happen on TV. Try to remember the old saying by Howard H. Aiken:
“Don’t worry about people stealing your ideas. If your ideas are any good, you’ll have to ram them down people’s throats.”
Do Not Be Fooled by The Most Common Lie
You are going to read lines such as, “The amount of seed money a tech company needs to take it into profitability is epic.” Such lines and comments are untrue. They are based on examples where tech companies had a lot of seed money and burned through it faster than a web company before the dot-com crash in 2001.
It is not the seed money that carries a company over into profitability. It is hard work and the ability to make profit that carries a company through those turbulent few years. It is the owner’s ability to see a problem and fix it with as little money as possible that makes a successful company. A good owner will offer the best possible service to clients without overstretching the company’s resources. The ability to go the extra mile without spending money is what gets a tech company through those first few ugly months and years. A good salesperson is worth far more than a large pot of startup money, and a focus on exploiting unique selling points is what matters. Bootstrap (self-funded) businesses are not the exception; they are the most common type of startup.
A large chunk of seed money is not a guarantee of success. A large pot of seed money is usually the reason why many startup-tech businesses fail. A company needs to grow and adapt, and a large amount of seed money often forces a business to operate at a level it is not ready for. Even the purchasing of expensive equipment invariably leads to larger overheads that the company is unable to withstand. Some businesses “need” to start small in a garage or back office, and it is hard to start small when investors have dropped £1 million in your lap.
If You Cannot Start on A Shoestring…Then You Shouldn’t
Getting started rarely requires a lot of startup money in the technology industry, and that fact is especially true today when people are able to outsource almost every large and difficult task that a tech company faces. If you genuinely feel that you need hundreds of thousands rather than tens of thousands, then you are very much mistaken. Even Microsoft and Apple started in garages.
Do you need your own server for its processing power? You can use cloud computing and save yourself thousands until you have made enough profit to buy your own servers.
Do you need an office to house your two employees? Have them work around your house (or even their own) and make enough profit so that you can afford an office without needing seed money to pay for it.
Venture Financing Takes Place in Rounds/Series
Now this article has made its point about starting small, let’s examine the fundraising method using venture capital investors/ angel investors. This funding method occurs in rounds/series. The rounds/series go “Seed”, “A”, “B” and “C.” Before explaining what these rounds mean, you need to understand how a business valuation works.
Investors are going to value your business and/or your business idea in their own way. However, many of them use similar methods. They create valuations with considerations such as your proven track record, proven and potential market size, management team, management track record, management experience, the assets the company has, both your liabilities and the company’s, and the perceived risk for any money invested (i.e. the risk of failure).
When investors talk about risk, they mean both risk of failure and risk of losing the money invested, which are two very different things. An investor may feel more comfortable investing $80,000 into machinery than $80,000 into advertising. The risk of failure may be equal in both cases, but the risk of a complete loss of money is lower if the startup is buying machinery that can be liquidated so some of the money can be recouped. Money cannot be recouped on advertising, ergo the investment in advertising is perceived as riskier.
About Seed Money
Getting seed money is very difficult because the “valuation” side of the investment is stacked against the startup company. They have very little proven track record, almost no assets, they are probably starting out with debts, the management is typically untested, and the risk is very high. Plus, seed money usually goes towards business development and market research, which means any return on investment is further away than most investors feel comfortable with.
When the business is a little more developed, when it has a track record, and when the possibility of profit is in the air, you are more likely to have series A investors make their offers. The idea is to develop the company and give it a stronger footing or foundation.
The business is now past its development stage and it is time to start building the business into one that does damage to its competitors. By this stage, the company is more highly valued and presents less of a risk to investors.
Any series C investors will start showing interest when it looks like a successful business may scale up. For example, series C investors showed up when it looked like McDonalds was going global. Series C is about turning your Angry Birds app into a multi-platform game with its own movie, branded merchandise, licensed adaptations of the game, sequels of the game, and a plethora of different games in development to churn out the next hit.
Increase Your Perceived Valuation
If you wish to increase your chances for getting a little seed money, you need to increase the perceived valuation of your startup. Pulling numbers out of the sky will not impress investors.
Start with as few debts as possible. Make sure you pay down and get rid of any debts attached to the business and/or yourself. Investors are smart enough to run credit checks on you as well as your business.
Bootstrapping it for as long as possible will allow you to build a client list, to build contacts, buy equipment and set up procedures. Both physical and potential assets are good selling points when you are trying to get funding.
Be Careful Regarding Market Size
Be very careful when discussing market size because most investors do not want to hear about the size of your market; they only want to hear about the many ways you will target the market. Remember the story about Kellogg’s trying to introduce breakfast cereal to India. Kellogg’s was salivating at the fact that even a small share of the breakfast market would made millions upon millions of new customers, but Kellogg’s failed to make an impact in India despite the very large potential market size. Show how you will change and adapt your product to increase its attractiveness to the different groups in your target market, and do not rely on the sheer size of your market to impress investors.
The longer you have kept your business afloat, then the easier it is to trust your management team. Plus, investors find it easier to trust people who have dedicated years of their life to a project over people who turn up saying they have a million-pound business plan.
Proven Track Record
Make sales! Make as many of them as possible. Even if your margins are thin and your business is not expanding, you need to make sales and show a verifiable track record. Show sales, show that there is demand, and show profit. Do all this, and even your bank may want in on the action.
Technically, you are dealing with the “perceived risk of failure,” and “the potential loss of all the invested funds,” and these are tough to overcome because investors have their own ways of judging risk. As candid as it is, the best strategy is to make it clear that your business can get along without the investment. Ironically, businesses appear safer when they do not need the investors’ money. Make it clear that the money needed is for building and creating efficiency. If investors think you need the money for survival, then they will be less inclined to invest.
Debt for Equity
You can arrange to have money invested in your business in return for a share of your business (the Dragon’s Den/ Shark Tank’s method). You may take a donation with no obligation to pay it back. Some investors will treat their investment like a debt where they expect repayment and interest, and some will treat their investment like a debt until the maturity date where the investor may swap his or her investment for equity in the company.
When an investor lends you money that may later be converted into equity, this is known as a convertible debt, and the investor makes this deal using a convertible note. The note will have an investment amount, an interest rate, a maturity date, and the investor may specify a certain target valuation or a cap that applies when the note matures.
A more common deal is called a “SAFE” (Simple Agreement for Future Equity). SAFE notes are more common these days, but they go in and out of favour as people read about tech companies having their company plundered because of SAFE notes that were signed during the startup period. You and your investors set the parameters of your SAFE note, and the investor is able to exchange it for equity or money in the future. A SAFE note is not a lending tool or debt tool, which means it doesn’t come with the insolvency threat that convertible notes do. Plus, SAFE notes may lower legal costs.
Angel Investors and Venture Capitalist Investors
Venture capitalists and angel investors are the pretty-much the same thing (angels tend to work alone or in very small groups). Venture capitalists and angel investors are people who invest money in businesses with the hope of making a profit. Some people differentiate these types of investors with more traditional investment firms and banks because venture capitalists and angel investors work on more of a person-to-person basis whereas traditional investment firms and banks are more about number crunching.
PR Strategy and The WanChain Example
If you wish to get investment from other people, then you should consider getting investments from multiple sources rather than approaching just one or two angel investors. The way that WanChain did this was not dissimilar from how other cryptocurrency companies have gained investment. When WanChain (WAN) publicized its launch, they explained how their cryptocurrency would change the way that cryptocurrency worked, they paid writers to review their upcoming coin, and they spent thousands on affiliate advertising to promote the ICO Token sale of their fantastic and revolutionary coin. WAN sold a bunch of their coins in their ICO Token Sale and made millions.
However, the WAN publicity strategy didn’t stop there. The company behind WAN saturated social media and websites with message after message. Every other day there was a conference in Beijing, a meeting in India, an alliance with company X, and a per-collaboration discussion with company Y. Over the months, they slowly but consistently dripped information and PR from social media networks and onto websites, and they used every trick in the book from AMA sessions to YouTube interviews with experts on the subject. By the time that the coin hit the exchanges, people were falling over themselves to buy WAN at between $5 to $9 each. Soon after the surge, the social media saturation slowed dramatically, and people who bought at between $5 and $9 were very upset to see the correction where WAN dropped to almost $1.
The point is that if you are looking to generate money from a lot of people, such as smaller angel investors, from potential clients, and from crowdfunding, then a consistent and varied stream of promotional information needs to be issued online. The WAN strategy worked because it was consistent to the point of being relentless, and this kept the coal fires burning until WAN was released on exchanges.
Using A New Cryptocurrency Coin to Fund A Business
In episode seven of the fifth season of “Silicon Valley,” we saw Gilfoyle try to push the idea of cryptocurrency. Gilfoyle says that instead of a company trying Series B (money from venture capitalists), Gilfoyle says they should try launching their own cryptocurrency and raise money that way.
Should you try to raise money by offering a new crypto coin? No. No, you should not try this method for raising money because it will not work. Check out sites such as CoinMarketCap, and you will see there are over 1586 types of coin on that website alone, and over 99% are what investors call “ShitCoin,” which is genuinely the correct term as given in Investopedia.
Only around 15 coins have any long-term value at the moment; the rest could disappear tomorrow with no impact on the economy at all. The crude term ShitCoin refers to coins that companies, scammers, and overenthusiastic tech firms have pumped out to make a few bucks, and the coins are completely worthless because they serve no use other than to appear on exchanges with the hopes that wannabe investors spend money on them. DodgeCoin was created as a joke, and even today there are still people buying it.
Even though there are still fools out there, you cannot make money by offering a new cryptocurrency coin. There was a time when you could tell people you were creating a coin to:
- Streamline your business
- To pay people for contributing
- Make your international payments cheaper
- To pay people in other countries
- As a payment method between businesses
- To allow people to easily swap different coins
There was a time when you could give these reasons and more and people would buy your coin because they thought it would appreciate in value. However, people are smarter these days. You can give people plenty of reasons why your coin will be valuable and “used” over the coming years, and people will not believe you. If you try to raise money offering a crypto coin of your own, you will be lucky to break even on your time and invested money.
Do Not Shy Away from Cryptocurrency
Cryptocurrency such as Bitcoin allows people to be paid in poor countries where they cannot trust their banks, and it allows people to build wealth without relying on banks or third parties. Plus, there are coins like Verge (XVG) that allow people to make anonymous payments, and Icon (ICX) that offers an All-in-One Blockchain ecosystem. Cryptocurrency is helping to change the world, but that doesn’t change the fact that most crypto coins are worthless (and/or will be in the future).
Do Not Try the Silicon Valley Trick
In the TV show Silicon Valley, Gilfoyle said that the company in question could use cryptocurrency to pay people for contributing. Using cryptocurrency to pay people in other countries is a great idea and it avoids a lot of contracts, tax agreements, international user agreements, and so forth. Bitcoin or even Ethereum are suitable for paying people overseas. You can offer people one of those coins rather than creating your own. Telling people you are creating a coin so that you may pay people is not as attractive as it was. People are wising up to the fact that you will be paying them in a worthless coin because your coin will be worth a fraction of a penny just a year after your launch.
Are You Considering Incubators Like Y Combinator and TechStars?
It would be unfair of us to advise you on if you should get involved with Incubators such as Y Combinator and TechStars, especially as some people in the US are treating these incubators like they are the tech-startup version of X Factor.
If you go through a YC or TechStar program, you are not going to meet Mark Zuckerberg or Elon Musk. Maybe they turned up once or twice, but you are more likely to see them in a Hollywood Bowl restaurant than you are at an incubator/accelerator program.
Though it would be unfair for us to advise you on if you should take part, as you need to do your own research and ROI study beforehand, we can say that both programs are introvert friendly. You may feel like attending, keeping your head down, and just writing code, and that is fine, but that is also how many of the other attendees feel. Introverted shy types are in equal numbers to mouthy the I’m-Gunna-Sink-Bill-Gates noise boxes who attend. Network with a few people who are also dabbling in your niche area, and at the very least you will do it learn a little more about your target audience.
The Bootstrapping Guide
The more you have to put down and put in, then the better off you will be – Albert Steptoe, 1962
Maybe you go the investor route and maybe you make it big, but the fact is that people will take you more seriously if you have invested years of your life into the project, and if you have something to put into the pot. If you turn up with an idea and empty hands, then people will find it harder to take you seriously than if you turn up with a garage full of equipment, a client list, a few willing volunteer workers, and at least some infrastructure and a proven track record. Bootstrapping your way through the first year or two is a good way to build your business up so that investors will take you seriously and offer seed money to set you up properly. Here are a few bootstrapping methods and ideas.
Use More Than One Method
There are plenty of ways you can get money, which includes keeping your day job until your business is self-sustaining. Do not look at articles such as this one and use just one financing method when you can use all of them. Sell your stuff, get a credit card, borrow from friends, outsource services, re-sell other services and beg family members.
If you are wondering why crowdfunding is not as popular as it used to be, then take a look at the Steam gaming portal. It is loaded with games that are half finished and/or just plain awful because they were crowdfunded, and the developers took the money, did a bit, and then ran. You could take a look at AngelList, Kickstarter, and Wefunder to see if there is any money to be had, but do not rely on them to fully fund your startup.
Pirating Your Own Material
All you do is upload your own torrents onto pirating websites, and you put up such a good version of your product that people stop downloading from other pirates and start downloading from you. You offer cryptocurrency addresses to donate to your next project. If people are going to pirate your product anyway, then you may as well do it yourself and reap the bitcoin donations that would otherwise go to copyright infringers.
Go to Your Bank
Forget asking from for a new business loan if you have nothing to put in and/or no provable profits. Instead, you can ask them for personal loans. You can say you are using it to pay off other debt or to refurbish your house if you wish. They don’t need to know that the money is going towards a new business.
Family and Friends Investors
Prove that your business makes money by making a little, and then approach your family and friends. Do not ask them for lump sums in advance because they will say no. Instead, as them to set up a direct debit into your account for $50 per month. As your business succeeds, you pay them back with interest, or you return their investment for discounted stock.
If any part of your business is creative, such as if you are creating apps, music, videos, tools, or whatever, then you need to get onto Patreon. It gives your fans a way of donating to you while giving them recognition at the same time. Giving PayPal donations is so unrewarding as a donator, but Patreon enables people to donate to you and get rewards back, such as: you can let them try your beta service for free, you can offer them secret deals, or you can show them behind the scenes. Patreon’s competitors (even crowdfunding sites) are struggling and Patreon is not, which suggests that Patreon will be around for a long time…so get involved now.
Sell Your Stuff
If you are really going for it, then risk it all. Sell everything you can live without, and even sell a few things that you have trouble living without. Risk it all and put all the money into your business. Not only does it raise cash, it also proves your own commitment and reinforces your personal dedication to your tech startup.
Final Tip – Outsource (Fake It Until You Make It)
As a final tip, consider offering your service and presenting the veneer of a large and successful company when you are actually a person sat in a backroom on your own. For example, you could claim to offer the best online cloud storage in the galaxy, but instead of people’s information being bounced around your half-million pound severs, you could buy the service from a larger company and sell it to your customers for a mark-up. As you make your money, you start building your own data centres and start transferring customers over to your systems. People do this sort of thing all the time, and it is not even illegal unless you are blatantly claiming that the cloud servers are your own. People outsource all the time, and that is all you are doing until you have the capital in place to offer your service yourself.