Four simple questions to ask before looking for seed investment.
For many startups, seed funding is the early-stage investment needed to accelerate growth for their burgeoning business. For others, it's all about enrolling the support, mentorship and connections of big deal players in the industry to gain traction.
However, a common mistake we see with startups is that they rush to meet investors, having not taken the time to stop and consider whether investment is right for them, how investable they are and if they understand the process. Ultimately, this can lead to a failed attempt at raising and will distract founders from building and validating their product.
So before you go gung-ho looking for investment in 2021, start by asking yourself these simple four questions.
Is investment the right choice for you and your start-up?
First things first: don’t be fooled into thinking that you must take on investment in order to scale your startup, be successful or become the next unicorn. The startup ecosystem today has bolstered the stigma that your startup is only as successful as your raise. This kind of thinking is shortsighted. Believe it or not, there is an abundance of very well known startups that have taken on little to no investment (think Mailchimp, Atlassian, Spanx and GoFundMe).
Instead, these startups have succeeded by ‘bootstrapping’ - the concept of growing exponentially using their own capital and resources (and by taking on little to no external investment). Bootstrapping is ideal for startups who want to maintain complete control and ownership. On the other hand, bringing in external investment works for startups who want rapid growth and to enroll the help of others with vested interests.
So when it comes to deciding between investment or bootstrapping, start by asking yourself the type of control and ownership you want now and in the long-term. If you don’t ever want to answer to anyone or give up control, then perhaps bootstrapping is best. However, if you are the type of person that is looking for additional support and mentoring, then bringing on investors could be for you!
Also, ask yourself if your startup really needs the investment amount right now or could you achieve growth using a different method. For example, if an equity raise isn’t your jam and you do want some extra cash flow, think about grants and taking out an old school loan from the bank.
What is your motivation for raising?
Have you ever read this quote before from Zappos’ CEO Tony Hsied - “Chase the vision, not the money; the money will end up following you”? While it is super cliche, nothing rings more true when seeking seed funding.
Having the right vision and passion are some of the key attributes to attract investors. They will want to hear what problems you are trying to solve with your startup and why you care about that problem. They will also want to know that you have the motivation to drive your startup to be the next unicorn. Remember you are trying to win hearts and minds by selling your vision.
Start asking yourself why you are motivated to raise. Is it just about having cash in the bank and putting your feet up? Or do you want to solve your problem and achieve some kick-ass goals in 2021 and beyond?
Do you have the right team behind you?
When it comes to early-stage investment, the likelihood is that investors are more interested in investing in you and your team, just as much as they are your idea.
In a study conducted by Stanford Business, “How do Venture Capitalists Make Decisions” it was concluded that the skills and abilities of a founder and their surrounding team are the most important factors driving investment decisions (often more important than even the product or technology itself). Why? Because investors want to see the startup they are investing in has a team of superheroes, with the skills and abilities to make magic happen.
Start by envisioning what your dream team looks like - what unique qualities and qualifications do they have? Do they share the motivation and passion as you do? Remember that when you have a uniquely qualified team behind you, your startup has a competitive advantage and this is attractive to investors. Also, if you are wondering how to attract and retain key talent - we are increasingly seeing the use of equity and profit-sharing arrangements!
Finally, don’t choose and add team members for the sake of the investment. Take your time to ensure that each individual is right for the role now and into the future.
Do you know what’s involved in the investment process?
We can’t stress this enough, before you even think about approaching investors, make sure to ask yourself if you truly understand the investment process and terminology used. Investments can be long, complicated and arduous processes. Failing to understand the steps involved and lingo could mean you end up with unfavourable terms or an investment that can have short or long term consequences for your startup.
Remember that your ability to sit across the table from potential investors, understand their world and talk confidently will be key to negotiating a successful deal (and impressing investors).
You will want to make sure you understand your startups valuation, the due diligence process and all the key language used in a term sheet. A top tip is to start by doing your own research. A great book to read is Venture Deals and check out this Investment 101 from the Startup Summit.
Also don’t be afraid to reach out to your peers in the startup ecosystem about their wins, losses and learnings. Remember you can also reach out to LUNA to ask questions too!
TAKE-AWAYS
If taking on investment this year is your goal and you are ready to put in the hard yards - then there is every chance you could make it happen.
As my old basketball coach once said, if you fail to plan, you plan to fail. The same goes with bringing on seed investment. Take the time before you start the process to reflect, consider and learn. Also don’t forget to always take a step back and reflect at multiple points along the journey.
Finally, remember that while bringing on seed funding can be a growling process, it isn’t an end to itself - really it is just the beginning. But being prepared will give you the best chance of a smooth investment process with the best outcomes!
Get in touch at hello@weareluna.co
