Updated: Jun 20
In the early stages of your startup, when it is in the MVP (Minimum Viable Product) or proof-of-concept stage and generating little revenue, several funding rounds may be pursued to secure the necessary capital for growth and development. Here are some typical funding rounds for startups in this stage:
Pre-Seed Funding: Pre-seed funding is the earliest stage of financing and is usually obtained from the founders' personal savings, friends, family, or angel investors. This funding is used to develop the initial concept, build an MVP, conduct market research, and attract a founding team.
Seed Funding: Seed funding is the first formal round of external funding. It involves raising capital to further develop the MVP, conduct market validation, and refine the product or service. Seed funding is typically provided by angel investors, early-stage venture capital firms, or specialized seed funds.
Series A Funding: Series A funding is the next significant funding round and aims to support the company's growth and expansion. At this stage, the startup should have achieved certain milestones, gained traction in the market, and have a clearer revenue model. Series A funding is often led by venture capital firms and can involve larger institutional investors. It is used to scale operations, enhance the product, and expand the team.
Series B and Beyond: Once a startup has successfully raised Series A funding, it may proceed to subsequent funding rounds, such as Series B, C, D, and so on. These rounds are typically focused on accelerating growth, expanding into new markets, and further scaling the business. The funding amounts increase with each subsequent round, and the investors often include venture capital firms, private equity firms, and sometimes corporate investors.
During the MVP and proof-of-concept stages, generating little revenue is expected, and investors typically evaluate startups based on their potential, market fit, and the founding team's expertise. It's important to note that the specific funding rounds and their names may vary based on location, industry, and individual circumstances.
Finding seed funding investors for a startup can be a challenging but a crucial task. Here are some of the best ways to locate seed funding investors:
Networking: Building a strong network within the startup ecosystem is essential. Attend industry events, conferences, and startup meetups to connect with potential investors. Join entrepreneurial communities, incubators, or accelerators that offer networking opportunities. Leverage your existing connections, including mentors, advisors, and other founders, to seek introductions to investors.
Angel Investor Groups: Angel investor groups are networks of high-net-worth individuals who invest collectively in startups. Research and identify local or industry-specific angel investor groups. These groups often have websites or online platforms where you can submit your startup pitch for consideration.
Online Platforms: Utilize online platforms that connect startups with investors, such as AngelList, Gust, or SeedInvest. These platforms allow you to create a profile, showcase your startup, and connect with interested investors. They often provide access to a wide network of angel investors and venture capitalists actively looking for investment opportunities.
Venture Capital Firms: Research venture capital firms that focus on seed-stage investments. Look for firms that invest in your specific industry or vertical. Study their investment criteria, portfolio companies, and any seed funding programs they offer. Reach out to the appropriate partners or associates within the firm with a compelling pitch about your startup.
Crowdfunding: Consider leveraging crowdfunding platforms, such as Kickstarter or Indiegogo, to raise seed funding from a large number of individual contributors. This approach not only provides capital but also allows you to validate your product or service with early adopters and build a community around your startup.
Pitch Competitions and Demo Days: Participate in startup pitch competitions or demo days organized by incubators, accelerators, or industry associations. These events often attract investors seeking investment opportunities. Winning or gaining recognition in these competitions can increase your startup's visibility and attract potential investors.
Incubators and Accelerators: Apply to reputable startup incubators or accelerators that offer seed funding programs. These programs often provide access to mentors, resources, and investor networks. The incubator or accelerator can introduce your startup to their network of investors or assist with investor matchmaking.
Industry-Specific Networks and Associations: Join industry-specific networks or associations related to your startup's sector. These networks often have members who are knowledgeable about the industry and may include angel investors or venture capitalists with a specific interest in your field.
Tailor your approach when reaching out to investors. Research their investment focus, check their portfolio companies, and personalize your pitch to align with their interests and investment criteria. Building relationships, demonstrating traction, and showcasing a compelling business proposition are key to attracting seed funding investors.
Now you got an investor interested it is time to look into the conditions for seed funding. Of course they vary depending on the specific startup and the investors involved. However, here are some typical conditions that may be associated with seed funding to give you some idea:
Equity Ownership: Seed funding often involves investors receiving equity in the startup in exchange for their investment. The percentage of equity acquired by the investors will depend on various factors such as the amount of funding, the valuation of the company, and the negotiated terms.
Valuation: The valuation of the startup is a crucial factor in seed funding. Investors will assess the startup's potential and determine its value, which influences the amount of funding provided and the equity stake they receive in return.
Investment Amount: Seed funding rounds can range from tens of thousands to a few million dollars, depending on the startup's needs, industry, and growth potential. The investment amount is typically determined through negotiations between the startup and the investors.
Convertible Notes or Equity: Seed funding can be structured as either a convertible note or an equity investment. Convertible notes are loans that can convert into equity at a later stage, usually during a subsequent funding round. Equity investments involve direct ownership in the company from the outset.
Investor Rights and Control: Seed funding agreements may include specific rights and controls for the investors. These can include board seats, veto rights on certain decisions, protective provisions, or other governance mechanisms that allow investors to have a say in the company's strategic direction.
Milestones and Diligence: Seed funding may be contingent on the startup achieving certain milestones or meeting specific performance targets. Investors may conduct due diligence to assess the startup's market opportunity, technology, team, and financial projections before finalizing the investment.
Use of Funds: Startups are usually required to provide a clear plan outlining how the seed funding will be used to drive growth and achieve key milestones. Investors will want to ensure that the funds are allocated effectively and in line with the startup's business plan.
You probably think. Are there any creative ways to get funding?
Here are a few examples of startups that used creative ways for their funding strategy:
Pebble Technology (now Fitbit): Pebble Technology, the company behind the popular Pebble smartwatches, turned to crowdfunding platform Kickstarter to secure seed funding. In 2012, they launched a Kickstarter campaign and set a goal of raising $100,000. However, they exceeded all expectations and raised over $10 million from enthusiastic backers, making it one of the most successful crowdfunding campaigns at the time. This not only provided them with the necessary seed funding but also generated significant buzz and consumer interest in their product.
Buffer: Buffer, a social media management platform, took an unconventional approach to securing seed funding by publicly sharing their funding process. They published a detailed blog post that included their pitch deck, financial projections, and the progress they had made. By being transparent about their fundraising efforts, they were able to attract the attention of potential investors who resonated with their approach and vision. This led to multiple offers of seed funding and ultimately helped them secure the capital they needed.
Tilt (now part of Airbnb): Tilt, a crowdfunding platform, used their own platform to secure seed funding. They created a campaign on Tilt and encouraged their user base to invest in their company. By leveraging the power of their own platform, they were able to demonstrate traction and generate excitement among their existing users, leading to a successful seed funding round.
Oculus VR (acquired by Facebook): Oculus VR, the virtual reality company behind the Oculus Rift headset, initially relied on crowdfunding to secure seed funding. They launched a Kickstarter campaign in 2012 and raised more than $2.4 million from backers who believed in their vision. This successful crowdfunding campaign not only provided them with the necessary seed capital but also played a significant role in attracting the attention of larger investors, ultimately leading to a subsequent venture capital investment and an eventual acquisition by Facebook.
What set their pitch deck and approach apart?
Pebble Technology: Pebble's Kickstarter campaign pitch deck stood out for a few reasons:
Clear Value Proposition: The pitch deck effectively communicated the unique selling points of the Pebble smartwatch, highlighting its features and advantages over existing products in the market. It emphasized the watch's compatibility with both Android and iOS devices, its customizable watch faces, and its long battery life.
Engaging Visuals: The pitch deck incorporated compelling visuals, including high-quality product images and demonstration videos. These visuals helped potential backers visualize the product and its benefits, creating an emotional connection and generating excitement.
Early Bird Offers: Pebble's Kickstarter campaign offered limited early bird discounts and exclusive perks to early backers. This created a sense of urgency and encouraged potential backers to contribute early to secure the best deals, driving early momentum and generating buzz around the campaign.
Community Engagement: Pebble actively engaged with the Kickstarter community by responding to comments, addressing concerns, and providing regular updates. This demonstrated their commitment to transparency and building a supportive community around their product, further fostering enthusiasm and trust among potential backers.
2. Buffer: Buffer's transparency-focused approach in their pitch deck and fundraising process made them stand out:
Detailed Financial Projections: Buffer's pitch deck included comprehensive financial projections that outlined their revenue model, growth projections, and key performance indicators. By presenting a clear path to profitability, they were able to instill confidence in potential investors about the startup's financial viability and long-term potential.
Openness and Vulnerability: Buffer openly shared their fundraising journey, including the challenges they faced and the mistakes they made. This level of vulnerability and transparency resonated with investors who appreciated their authenticity and ability to learn from setbacks.
Focus on Culture and Values: Buffer's pitch deck emphasized their company culture and core values. They showcased their remote work culture, commitment to transparency (including publishing employee salaries), and focus on creating a positive and supportive work environment. This unique approach helped investors understand the startup's philosophy and long-term vision.
Remember that seeking funding to get beyond MVP requires strategic planning just like your GTM. Use your creativity to stand out and be super professional in your delivery.