Minimum Viable Product · Fundraising

How much should you raise in a seed round?

John Anderson

December 10th, 2013

I've seen a few companies willing to invest somewhere in the neighborhood of 150k for a stake in the company. This would provide some working capital, but I'm asking myself would this be enough to fund a startups operation for 6 months with an office and 2 to 3 people? Probably not. Or maybe I'm missing the point of this stage of investment. Is it meant to allow finishing an app from an MVP to a true market ready product? Perhaps get it to a point where it would be more suitable to get a higher level of funding? Any advice would be truly appreciated.
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Bar Segal Partner at Paloma Oro

December 10th, 2013

Hi John,

In my start-up Eatro, we are three co-founders and friends who live together. Our goal is to raise 100K GBP for around 16% equity. This will cover the development of an App for Android and IPhone, a final version of our website, Marketing, Sales and a bit of living expenses. It doesn't cover salaries or office space. To ask for anymore at this stage would be giving away too much equity at our current valuation. So like the previous comments say, it's mainly to get traction.

John Sechrest

December 10th, 2013

It really depends on your investors and different regions have different expectations. However, most Angel Groups that are investing 100K+ are looking to see that you already have traction with a market and already have the foundation of your team and that you already are moving forward with the product. So the seed investment is aimed at accelerating initial market growth. This is significantly different than the early original idea for seed round investments, where the investment was building initial infrastructure to make it possible to get traction. However, the cost of starting a company for many companies has come down so radically, that many investors are expecting that you have already moved forward with initial customer engagement before the Angel Round at 100K. Two guys + a coworking space + no salary is somewhere around $12K for a year. If you as an entrepreneur do not have the personal warchest to support your lifestyle for the initial 12-18 months without a salary, then there is some refocusing and rethinking that should happen. Perhaps the initial focus should be to gather a warchest to make starting the company more likely to succeed. What investor wants to invest in a company, where the chances of loosing the principal players is likely the first time that you hit some kind of revenue crisis?

cbgsfghjsfhjs arggadghA Brightway Insurance & KnowMyNestegg.com

December 10th, 2013

I could do a lot with $150k but to use it on anything other than product and sales would be foolish.

At this stage in the game there is no need for an office, and any co-founder that wants to be paid should be replaced. co-founders get paid when they build a successful set of systems that offer value to everyone else. co-founders get paid last.

buying input data, testing marketing/sales channels, getting customer feedback, iterating on the beta,

The goal is to achieve some kind of proof of concept with $150k and if you could get any cash inflow going that would be great also.

Anonymous

December 10th, 2013

Dude, if you are spending 20k a month on an unvalidated product that would worry me quite a bit.  If you can get 150k pre traction, I would take it.  The move to Portland, live in a house with your cofounder and have a budget of 6k per month.


Candice Hughes, PhD, MBA

December 11th, 2013

I agree with Rob and other comments. I haven't heard any investor say they provide money for the earliest seed stage pre-product. They expect the entrepreneur to support their own financial needs as well as spend money as needed to develop the initial MVP. In some parts of the country, you may be able to find a technical partner who will work with you for equity. In others, you may have to pay technical people out of your own pocket (hopefully, you can negotiate a reduced rate since no startup can afford the full fee an established company would pay). As your company gains attention and notice, you will start to find it easier to attract good people who will work with you for equity.

So initially, the financial burden is on the entrepreneur. By taking this on, they demonstrate faith in their product and perseverance. This may be harder when the entrepreneur is more established in their career as they can't live in their parent's basement, but on the other hand, they have had time to build up savings over years.

Steve Karmeinsky CoFounder City Meets Tech / Lean Capital Ltd / Placeholder Ltd

December 10th, 2013

In the UK there are massive tax incentives for investors (SEIS scheme), where a company can raise up to £150K and a HNW can invest up to £100K per year, the investor can right-off £50K income tax and another £14K capital gains tax - so for a £100K investment the government is writing off £64K - obviously only makes sense for people who have those types of tax liabilities.

Start-up costs are very low and that can easily get you to an MVP (at least for a web based service).

There are also other tax breaks for investors (say EIS, not quite as generous) where the investment limits are higher. So get SEIS to MVP, then EIS to get product out there.

Steve

Mohammad Forouzani CEO at Forecast.net

December 10th, 2013

The short answer is that yes it would. Remember at this point, your team should really be made of founders, who dont get market rate salaries at this stage of the company.

It should allow you to validate the idea and start getting traction (or simply grow your traction), at which point you can raise the next round.

Rob G

December 10th, 2013

at this stage money is like earplugs.  If this $150k is coming from experienced investors (VS friends and family) the expectation will be that 2-3 guys and a dog have already been hunkered down in their respective caves and/or a cheap co-working space and built an MVP that the sales guy (team should have dev and sales min.) has already used to test market/customer fit (pricing, distribution, etc.). A couple of Stanford PhD candidates (or MIT or Harvard) with a great idea is another animal that can attract a small investment like this with nothing more than their idea and the proof that they are smart and focused and coachable (and some solid contacts) - an aqui-hire is the investor's fall back.  For the rest of us mere mortals investors are looking for proof, not promises, that you are resourceful, so passionate that you are willing to forego the comforts to achieve your dream and that you have proven (to some extent) that a market exists with customers who are actually using if not paying for your product (traction).  Necessity still is the mother of invention.  Friends and family could be a different story, but if you are expecting to get paid to experiment with someone else's money and to pay for luxuries such as office space with your F&F's money then you many not have friends or family left in the end.   Coming from someone who has had the luxury of funding his own startups i can say that even if i had the $$ to pay for salaries and office space for this my 4th startup, i would not do it again (with few targeted exceptions).  There is something about the discipline and resourcefulness enforced by the lack of $$ in the bank account that forces adherence to lean principals.  If you CANNOT pay some PR or marketing or sales person to go out and 'generate' interest in your product that forces you, the founder, to go out and do it yourself and this lesson is invaluable.  If you can't pay a developer to build your product then you have to go out and convince a developer to forego the luxuries and do it for equity (this is one of the very few exceptions, but use caution here too and adhere to a very rigorous budget if you do pay for dev and only after you have proven market/customer fit and revenue model YOURSELF).  The result is the market is telling you something - something about your product, your skills, your pitch, etc. and you NEED to listen.  Money in the bank provides the fool's luxury of proceeding despite what the market tells you. 

Shannon Code Chief Architect

December 10th, 2013

As an Entrepreneur with a day job and a handful of contacts I'm in a position where I would need 6 months salary to a years salary in order to stop the day job, and not be required to take contracts. That would eat up an investment of $150k in ~6 months if I add in expenses related to licensing, tools, etc. I'm in this position at the moment. I have a few great proof of concepts and no time to work on them because of my job and contract work. Stopping those means my mortgages don't get paid. 

Will an investor invest this kind of money for the reason of paying the primary stakeholder? I thought I could generate this kind of investment from crowdfunding but learned the hard way that crowdfunding is much more than just listing your offering on indiegogo, The successful campaigns market, market, market.

Dimitry Rotstein Founder at Miranor

December 11th, 2013

> I haven't heard any investor say they provide money for the earliest seed stage pre-product.

Though investors may not say it, there are known cases where a startup raised 7-digit or even 8-digit sums at the idea stage (without even starting development). But the only reasons I know that this could happen is if the founders have a huge success (like an 8-digit exit) in their CV, or they are backed by the industry giants or the government (in which case these would probably be the primary investors), or both.