Fundraising · Seed funding

When to Raise Seed Funding - Before MVP or After?

Richard Pridham Investor, President & CEO at Retina Labs

January 19th, 2015

I'm getting ready to launch a new start-up. Idea and market need has been validated. A couple of other VC-backed start-ups have emerged with similar idea so time to market it critical.

I am wondering what the best strategy is for seed funding. I'm ball-parking about $200K - $400K to get an MVP to market and for market dev / customer acquisition. I can fund this myself (with or without co-founder which I am currently seeking) or I can try to raise some seed capital right away. I'm confident I can raise about $1M - 1.5M purely on the idea. This would allow us to go much quicker and get a more feature rich product to market fast. It would also allow for more funds to drive user adoption.

One school of thought being proposed to me is to fund MVP, get a reasonable degree of user adoption and then raise at a much higher valuation. The problem with this approach is that you never really get started out of the gate. MVP may lack features that users want and you don't have the funds to drive user adoption. So you fail before you even start.

Any thoughts?

Michael Brill Technology startup exec focused on AI-driven products

January 19th, 2015

Taken at face value, if you can raise your $1m-$1.5m quickly, then I'd do that now... especially if you're a bit late to the party. As Robert said, most founders don't have the luxury to raise money ahead of any traction, so take advantage of that. It looks like you've got a fair bit of biz dev on top of any software development, so you're probably talking 6-9 months to get going. With the declining number of seed deals, who knows what the world will look like in 2H15.

Jessica Alter Entrepreneur & Advisor

January 20th, 2015

You should try to build out proof of concept and get some data on your assumptions first. Then build something rough but workable for not a ton of money. In today's world where hosting is free for the first year (AWS) and you have tons of services (shopify to twilio) that you can build on top of.

Unless you have an incredible track record or friends and family with deep pockets people don't want to fund you to build an MVP. Part of showing that you have the drive is getting this done on your own.

Bruce Schechter Startup Advisor, Mentor and Aficionado

January 20th, 2015

Regarding your topic, this recent blog post by Jason Calacanis may shed some very useful perspective.   He's right on the money, from my perspective:

Cheers, Bruce

Tony Dykes CEO at NovolBio

January 19th, 2015

The MVP is really do demonstrate competence in that domain and that you aren't getting an education on their dime before the cram-down comes and you chuck them overboard. If this is your fifteenth app you could get away with pointing to your past successes as an equivalency. If you can raise that kind of money on an idea do it.

Edward Upton Founder, LittleData. Digital Product Manager and Google Analytics expert

January 20th, 2015

The answers here are all from a valuation perspective, but there's a really good reason to raise funds later if you can afford:  you'll build a better, leaner product.

MVP's are not necessarily about flakey prototypes with only mimic what a 'funded' product would do.  It's about finding the few features that users really want to pay for.

Having limited funds - but enough that you can have a team of 3 or 4 people full time for 6 months - will enable you to iterate much more quickly over these features. And prove which ones are essential before you hire and spend more money.

I've worked as a 'turnaround' product manager for a well funded ($2m) startup, and they has started marketing spend well before they had a product that engaged users.  More money meant a slower moving team, not a faster one.  And it was a lot harder to turn around once mistakes had been made at scale.

As one of my mentors (Bill Liao) put it, startups drown more often then they starve!

Robert Clegg

January 20th, 2015

Richard, be very weary of Idealism and Generalism. 90% of businesses fail, very few have exits. If you can raise money now on an idea, more power to you. Do it! The last thing you should be worried about is valuations and what if scenarios that are 5 years down the road and have long shot odds. Hey, if they say the business plan is obsolete once it's written, how can you worry about projections and valuations that look 5 years into the future?

If a couple other vc backed co's are in this already, you'd better get going! If you are worried you are going to waste the money because you can't control a team and project manage a prototype, then you aren't cut out for a Series A round either.

Fail fast.

Talk to people who have startups that have raised FF, A, B, and C rounds. You'll hear their stories don't fit a mold, a generality, or an expert's article. there are always nuances and even big strokes of strategy that turn the tide.

Get in. Get Going.

Clifton Flack #PassionateStrategicMarketer

January 19th, 2015

You should always try and raise as late as possible and go for the higher valuation and longer runway on what you raise. But I think the issue / consideration here is more about how much equity you give up at idea stage compared to after achieving adoption. If you give up too much % too early you'll be less attractive for later stage funding Just imo

Misha Britan

January 19th, 2015

Not sure if this reply works, but that's our strategy for the moment. If there is even 10% of user adoption that you hope to get with a full MVP1, at least you know you've got something...

Richard Pridham Investor, President & CEO at Retina Labs

January 19th, 2015

Thanks Clifton. Good point. Typically, what's the equity % an early stage VC would take? Would 20% with a pre-money valuation of $7.5M fly?  

Robert Clegg

January 19th, 2015

I know of no vc that will put in money before traction UNLESS you are a proven entrepreneur in that specific market with an amazing exit under your belt already. Okay, that removes 96.5% of us from the discussion here. Having said that, since you are asking these question here, I'm going to assume you are not in that category.

Therefore, raise the seed round. VC's will want to see you plan and execute. They will also want to see other people's money in the game - demonstrates a whole other range of skill sets and runs you through all these scenarios so you will be comfortable at the vc negotiation.

Then demonstrate scalable traction with that $1M.

Happy to discuss. PM.