Questions

When is the the right time to seek out seed capital?

I've found a lucrative e-commerce niche. I'm gaining traction in my proof of concept stage.

5answers

I'm a small-time investor and have been working for and with startups for 13 years.

The time to take seed capital is:

- When you've proven demand for your product by making sales.

- When you have at least one repeatable, predictable, and profitable system in place for selling your product.

- When taking an equity investment would let you grow the company faster than the other means that might be at your disposal: bootstrapping, debt financing, organic growth, joint ventures, etc.

There's a trade-off. You want to get the idea validated up-front and get as far as possible as you can on your own, but not spend so much time doing this with meager resources that the opportunity passes you by.

You don't want to give away the whole company to your investor, but you also don't want to stunt your growth and give up huge potential profits just because you were holding out for slightly better terms.

The better your sales, and sales growth, the better the valuation you'll be able to negotiate.

A great idea and a proof-of-concept alone are worth basically nothing.

A company with sales is worth more.

A company with sales growth is worth even more.

A company with month-over-month sales growth, ongoing relationships with customers who repurchase, and steady-state profitability is worth *much, much* more.

(Steady-state profitability means that if the company's number of customers stays the same, the business operations turn a profit. Often, early-stage companies that have a recurring-revenue business model will spend more to acquire a new customer than they earn from the first sale; the cost of acquisition is amortized over the lifetime of the customer. This is because they want to grow their recurring-revenue base and increase future profits at the expense of short-term negative cash-flow.)

All that being said, if you think you will need venture capital funding in the future, you should start looking for it long before you're going to need it.

Have a "Plan B" in place, too. Don't get stuck with your back up against a wall, hoping and praying that your seed round will close before you start bouncing checks. If your investor knows you're going to go bankrupt without the investment, they have a lot of leverage for getting very favorable terms!


Answered 6 years ago

We've raised close to $1M in seed capital. We've done things right...and done things wrong...so take this with a grain of salt.

Your question was about SEED capital. One answer I saw (from Brian) was thoughtful, however, he's talking more about early stage capital (repeatable sales, profitability, etc). The reality is, many startups find that they can't get to this stage without seed capital to get started.

One answer: As soon as you have a prototype, and thoughtful feedback from customers. Being able to show an investor (literally) the vision for your product -- and, at the same time, that you've done due diligence with customers in the form of customer development. If you've done these two things, then you might be ready to talk to *seed* investors. Might you give up more equity at this stage than if you're profitable? Sure. But again -- but if seed capital is what you *need* to get to that stage, then this is the time to attract it.

And once you're at this point -- have *as many* conversations with potential seed investors as possible. It may take 10 no's to get to 1 "yes -- and even then, you want to make sure the investor is the right one for you.

Another answer:

Don't go after seed capital at all. Bootstrap the company, and skip this stage altogether. Fund the company with customer revenue. Keep in mind, when you take on investors, you have a very real responsibility to them. Instead of "no boss", you might have ten. Although, who are we kidding -- even bootstrapping founders still have multiple bosses (employees, customers, etc).

I hope this helps.


Answered 6 years ago

Being there I have to say that once you have paying customers. Your venture's market cap can help determine the % of paying customers you might need to start pitching and be considered. With that said it never hurts to just approach a few angels, let them know what you have and ask for feedback on what they would "require" ultimately you have to please who is giving you the money... They all vary.


Answered 6 years ago

Investors are risk averse and follow the crowd - start gathering momentum now and they all will want to join the round.

Financing rounds usually take longer than you think.

If you have traction, you can start seeking investment.


Answered 6 years ago

The best time is when you realise you need extra funds to grow. When you realise it is beyond just bootstrapping and you believe it is something that can really scale


Answered 4 years ago

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