Seed Funding for Startups - Everything You Need To Know

in this video i cover everything you need to know about seed funding for startups i'm going to talk through it from an entrepreneur's perspective you're going to learn how to navigate it when you should consider it and when to avoid it and if you stick around to the end of the video you'll hear one of the biggest mistakes i've seen early stage founders make with seed funding i'm rob walling a startup founder with multiple exits author of three books about building startups and an investor in more than 100 companies i want to start by defining seed because seed and i'm making air quotes down here the definition of that has changed over the years seed rounds didn't even really exist until the last let's say 10 or 15 years but for the purposes of this video i'm going to talk about a seed round vaguely as the first round that you raise it's a fluid term it means different things to different investors and it changes over time now once you start raising five or ten million dollars that's what we call it a series a i think everything before that can safely be called a seed round what about an accelerator round you know what if you take money from y combinator or the accelerator i run called tiny seed is that a seed round i think for the purposes of this video it is and those rounds are in the low six figures so i think we'll lump all of that in normally if i were to get super technical with it there'd be a pre-seed and a seed and a series a depending on how you do it but that gives you a general idea of really how you know maybe complex these terms actually are and how fluid they are but with that in mind let's talk about why should you think about raising funds at all and there's something that i've said many times which is in your personal life money can save you hours because you can have someone go do grocery shopping for you or cooking or mow your lawn take your dry cleaning in your business money saves you years what i mean by that is raising funding allows you to move faster i heard one founder say it allows me to live in the future because i'm hiring ahead of my revenue and that is the most common use for funding in startups is hiring right it's to accelerate your product velocity it's to accelerate your marketing and your sales efforts and usually you do that by hiring people with that said i have a mental model around funding and you may have heard of the 80 20 rule which is 80 of the results you get from 20 percent your whatevers i have the 1990 rule where i think of all the tech startups in the world that are going to be high growth and should even consider raising some kind of funding i think around one percent of them should consider and go after venture capital and i think around nine percent should consider or go after what i'm calling indie funding and seed rounds i'll define indie funding in just a second but i think a seed round without the expectation of raising venture later is actually quite helpful for a lot of companies and then i think 90 percent of companies should probably bootstrap so that's my one 990 model another reason to raise funding that a lot of founders don't realize or a lot of people don't talk about is with funding oftentimes you can get good advice from them you can get mentorship you can build out your network and even have a community of other founders who've been funded by that same fund or by that same investor i mentioned earlier that i run an accelerator it's for bootstrap sass founders and i would estimate about three quarters of the founders who apply to tinyseed tell us they don't do it for the money they say we don't need the money but we're doing it for the mentorship the advice the community the guidance people who have been there and done that before us and can help us navigate these waters because you know when someone is doing 40 or 50 000 a month and they apply to an accelerator they probably don't need that money but realistically the advice and the guidance and the mentorship and the community is so much more important for that now let's talk about when you should consider raising a seed round there are a few steps build a product get some traction the amount of traction varies widely from investor to investor but in general if you don't have traction you haven't done much you haven't proven to investors that you can ship product and that you can sell and market because you need to show people that the idea is valid and you need to show people that you are a founder who gets things done and the way you do this is by shipping features by marketing and selling a product and growing your business until you've done that you just don't have much and that ties into the quote you've heard me say on this channel before build your business instead of your slide deck build that business get your monthly recurring revenue up get people paying you because that tells such an easy story if you're growing from one month to the next it's so easy to then build that slide deck later and say look this is our mrr graph i mean that alone is what a lot of investors look at in addition to market dynamics and realistically growing revenue month over month is absolutely the best way to get the attention of investors and so wrapping up this thought of when should you raise a seed round i mentioned get some traction but it varies based on investor we at tinyc require 500 mrr to apply and we have funded some slightly below a thousand but usually you know the majority of our companies are in that 2000 mrr up into the 30s 40s and 50 000 a month it's a pretty broad range and some investors may want you to be further along on that and they want to invest at a higher valuation there's a lot of seed investors that if you build a business to ten thousand dollars a month and you're growing well i don't think you're gonna have a terrible time going out and trying to raise funds as long as it's not a really hard economic time now one thing to keep in mind is the type of investor that gives you money influences what kind of outcome they want and what they will push you to do so angels friends and family sometimes they're motivated heavily by money and sometimes they want to just support you and they want to give back and so they're not going to put a bunch of pressure on you to grow quickly traditional venture capital pretty much always wants a moonshot they want a billion dollar deck a billion dollar evaluation and so if you build a business to 10 or 20 million dollars it's a failure to them if that's not what you want to do go after the billion or 10 billion probably not a good idea to take traditional venture and separately there's this movement of indie funding i mentioned it earlier it's funding that allows you to not have to go after the moonshot and to not lose control of your company chinese the accelerator i run is indy funding indie. bc was the first institutional money that i had ever seen invest and there are a few others there are also angels out there when i put investors into the indie funding bucket it's usually that they don't have the expectation that you need to have this massive outcome and they can make money and return money to their investors if you sell for 20 30 40 million rather than in the billions in addition many indie funding sources are okay if you want to run the business for long term and pull out profits and this is a newer space i mean indie. bc i believe launched in 2016 tinyseed in 2018.

so it's a a relatively new space compared to traditional venture capital but what i like is that it's expanding and it's giving more entrepreneurs access to capital and helps make the journey a little bit easier and it can save years when you have money into your business as i said my 1990 model if only one percent of startups should raise venture funding it's like what are the other 99 supposed to do and that's one of the great values i believe of the indie funding model something else to be aware of is even among the types of investors your valuation influences what kind of outcome you can go for so if you take a seed round at a 2 million valuation then the investors will probably be pretty stoked for a 20 million exit right because that's a 10x return on their money if you take money at a 20 million valuation they are probably not going to be stoked for a 20 million exit they're probably not going to be stoked for even a 40 or 50 million exit because a two and a half x return on an investor's money it isn't worth it for the risk because there's so much risk investing in startup you know the higher valuation comes with more strings attached and i i do think that some founders don't think that through that it can be advantageous to you if your goals are to sell at 20 or 30 million so take money at a lower valuation because that it then is a win for you and it's a win for the investors as well last thing is to beware of uncommon or founder unfriendly terms that can blow up your cap table selling equity in your company or raising a safe which is a y combinator note a promise of future equity usually these are relatively safe now that clauses can be added to them that make them more complicated you know if someone has a liquidation preference that's greater than 1x that's not great it means the the investor gets back more than their money when you sell the company and that you know that can be a tripping point we've also seen terms where an initial investor's investment expands and so they put in a hundred thousand dollars cash and that could turn into 300 000 of equity under certain occurrences and so they can own a substantially larger portion of your company than you want them to or than you expect it's unfortunate but there are some less common or some founder unfriendly terms and what you want to do is you need a lawyer to look at those and read through them as well i know there's a lot of legalese but you can at least get your head around some of the basic terms and if you use plain vanilla documents like a safe or just sell straight equity without you know added clauses that can be a way to mitigate that obviously i'm not a lawyer and you should talk to a lawyer if you are going to raise funds in a second i'm going to talk about one of the biggest mistakes i've seen early stage founders make with funding before i do that i wanted to mention tinyseat we are at tinyseed. com and we are the first and most respected accelerator for sas bootstrappers if you get to even 500 or a thousand dollars in mrr you should apply to tinyseed we have both an accelerator that runs in the us and in the europe regions as well as a syndicate that if you're further along let's say you're doing 50k mrr 100k mrr an accelerator may or may not be a fit for you but we have a syndicate of investors who are interested in investing under these indie terms which is where you don't have to become a unicorn to be a success check us out at tinyseed.