This post originally appeared on the Wharton Entrepreneurship blog.
For first-time entrepreneurs, raising a seed round can seem like a daunting task. We went through our own seed fundraise at Kinnek back in December 2012, so I know the difficulties firsthand. While there’s of course no magic formula or trick that can guarantee you a successful fundraise, there are definitely certain things that helped us tremendously and I wish I had been aware of sooner. I’ve detailed five tips below that I feel can definitely put you on advantageous footing when it comes to raising a seed round of financing:
1) Become an expert in your area.
When you’re at the seed stage, there are a lot of things that can be forgiven. Small customer base? Not fatal. Don’t have a lot of revenue? Not the end of the world. Product doesn’t look gorgeous? Not a big deal. Don’t have a good understanding of your space? Now that is a very, very big deal. Convincing investors that they should bet on your company is a two-part job – first, you must get them to believe your target market is massive and interesting, and second, you must show them that you have the right team to tackle that market. The best way to convince an investor of this is to demonstrate that you are an expert in your area. Know your competitors, your market, the numbers, the history of your space. Try as best you can to be well-versed in all the facets of your company and its market. Then, investors will feel that they have no choice but to invest in you, given that they are excited about your market. Otherwise, you could run into a situation where the investor loves your market, but doesn’t feel you’re the one best equipped to take it on.
2) Do your homework about investors.
This cannot be overstated. Successfully raising a seed round involves a lot of planning, and a lot of research. Map out your prime investor targets. Understand which Partners and Associates at a given firm are the right ones to speak with. Research a firm’s sector and stage focus so that you can understand what things they may look for in an investment. Before you meet an investor, know their portfolio of companies, especially companies related to yours, so that you can speak intelligently about why they are the right investors for you. Don’t just blindly walk into meetings with investors, or set up meetings with investors who are entirely unrelated to your sector. You won’t be doing yourself any favors.
3) Remember the arithmetic that’s at play.
Investors meet a lot of companies. And they read the pitch decks of even more companies. Yet they only invest in a very low percentage of these companies. At the end of the day, even the most active seed funds in the country may make a few dozen investments in a year, and they’re considered true outliers. So it’s all about separating yourself from the crowd. It’s not about trying to convince an investor that they should invest in you, it’s about convincing an investor why they should not reject you. And that frame of mind can really help you create a more powerful pitch. Everyone tries to pitch their company as being awesome, but very few are successful at explaining why their company is an investment opportunity that cannot be missed out on. It’s a nuanced (but important) distinction.
4) It’s not about the magnitude of your metrics, it’s about the growth.
When you’re a company at the pre-seed stage, it’s entirely reasonable that you don’t have 1 million customers or $1 million of annualized revenue. So don’t feel embarrassed or get caught up in the absolute levels of your metrics being low. It’s way more important is to show that you are growing fast and learning quickly. Emphasizing that you are improving your processes and metrics and efficiency week after week, month after month, and showing that growth is accelerating is the right way to excite investors for the seed round.
5) Don’t use arbitrary deadlines to try and get the first money in.
I know getting that first investor check can seem like an impossible feat. Many entrepreneurs try to use artificial deadlines to manufacture a sense of urgency among investors and get that first check. However, it’s important to remember that investors can often see through your claims that “My round is closing ASAP” or “Our round is closing on November 27”. Every entrepreneur says those things, and investors know it. Those are empty words to them. The real secret to getting the first money into your seed round is that once you finally find an investor who truly believes in your idea and is palpably excited by the opportunity, have an honest conversation with them about how getting them onboard early will help you close your round much sooner. If they are truly interested in your business, they will also be eager for you to get back to building it.
While a lot of these things are easier said than done, I hope they help de-mystify some of the challenges surrounding seed rounds. Since raising our seed round, we’ve been fortunate enough to continue growing at a rapid pace, and closed our Series A round of financing a few months ago. If you’d like to chat more about Kinnek’s fundraising experience, please feel free to reach out to me at firstname.lastname@example.org. And if this has inspired you to join our team, definitely check out opportunities at www.kinnek.com/jointeam.
Karthik Sridharan is co-founder and CEO of Kinnek, an online marketplace that provides small businesses a better way to find suppliers and make purchases. He is a graduate of the M&T Program (Wharton ’07, SEAS ’07), and lives in New York City.