United States: The Changing Landscape Of Seed Stage Financing, Part I: Choosing Your Investors

As a startup founder, you have burned through a lot of your own savings (and maxed out the proverbial credit cards), but thankfully you have an MVP (minimal viable product) or better, and now are ready to raise your first seed financing. You are faced with a number of questions, several of which we will discuss in upcoming additional posts.

Who do you approach and who are viable investors at this stage? The choices have changed pretty dramatically, for the better, over the last few years; in no particular order, here's a list of some of the possible financing sources and some quick thoughts on each.

  • Bootstrapping (founders' own funds) – Ok, we burned through that...
  • Friends and Family – Beware, they must be "accredited investors"* and "money changes everything..."
  • Individual Angels – Probably your best and most likely option. It's hit or miss though. Sites like AngelList can be helpful but can backfire if investors perceive that you have been "over shopped" and may ask, if you are such a great investment, why isn't everyone else leaping at the chance to invest?
  • Super Angels – Great if you live in a thriving tech ecosystem like Northern California or Boston, Seattle, Boulder or Austin, but much harder to find a warm intro to a Ron Conway, Dave McClure, Pejman Nozad, or Reid Hoffman if not. We often find individual partners at venture funds can meet this description.
  • Angel Groups – These membership-driven groups can be a good choice (e.g., Band of Angels, Common Angels, New York Angels). They give you lots of exposure, but that may not necessarily be a good thing. The process can also be painstakingly slow.
  • Crowdfunding, ranging from donation-based (no actual ownership acquired or optioned, e.g., Kickstarter, Indiegogo) to actual investment-based (e.g., AngelList "Syndicates" fundraising platform, Crowdfunder, FundersClub) – Donation-based sites can be helpful, but geared more towards project-based campaigns and consumer oriented products. Investment crowdfunding sites will be able to legally operate as of September 23rd of this year (with the SEC's adoption of rules to implement the JOBS Act), but it's an unknown environment and involves heightened standards for companies to demonstrate they are receiving investments only from "accredited investors."
  • Accelerators – Can be an excellent choice if you lack a great network, don't have deep substantive experience with founding and ramping up a startup, and are fortunate enough to be admitted. A good accelerator mixes excellent mentoring, connections and funding; it usually comes with a modest amount of investment from the accelerator itself, but often with well-known accelerators come other sophisticated angels and investors ready to write checks. A few are national in scope but with regional groups (e.g., TechStars Boulder, Boston, NYC, Chicago, LA), but most are regional (e.gs. Y Combinator, AngelPad, 500startups in NoCal, MassChallenge in Boston) and many focus on particular investment themes (e.g., Techstars Cloud for cloud companies, The Alchemist Accelerator for enterprise software).
  • Venture Firms (focusing on their seed funds or programs) – More and more traditional venture funds have set up seed programs (e.g., Sequoia, Venrock, Lightspeed, Crosslink, Foundry, Spark, Union Square). They can be a blessing and a curse...good, insofar as it's a pretty quick check and not a lot of hassle, whether or not the company fails, but bad insofar as they typically do not provide a lot of support or mentoring, and if they fail to participate at the Series A round, can be a huge negative.
  • Micro VCs – Much smaller than traditional funds (e.g., Floodgate (Mike Maples), Felicis Ventures (Aydin Senkut), Harrison Metal (Michael Dearing), Lowercase Capital (Chris Sacca), they typically have narrow investment focus, with other examples including Mission Bay Capital (early stage bioscience) and LifeForce Ventures (early stage digital healthcare).
  • Strategics/Corporate VCs – Not traditionally considered "seed investors," but if a good fit, they might fill out a round (e.g., Google Ventures, Intel Capital, SAP Ventures, Samsung Ventures, Novartis, In-Q-Tel).

While it's hard to generalize, in considering which route to go if you are so lucky to have a choice, important factors in addition to investment amount (i.e., cash runway provided) and valuation (whether actual pre-money if seed preferred or a "price cap" if convertible debt), include the investor's network (i.e., access to customers (if B2B, or B2B2C), entree to key industry players), strong domain knowledge and operating experience and advice, credibility and reputation, and ability to participate in, or at least provide key assistance with, future rounds of funding. Also, for more science based startups (e.g., life sciences), early funding also can include government or university research grants.

* An accredited investor is basically someone whose net worth, either alone or with a spouse, exceeds $1 million (not including the equity in her or his primary residence) or someone who has earned more than $200,000 (or $300,000 with a spouse) for the past two years and reasonably expects to earn more than $200,000 (or $300,000 with a spouse) in the current year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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