What VCs look out for in Seed Rounds

A Startup Founder’s Perspective

Photo by David McEachan from Pexels

The goal is to generate a high return and a quick turnaround on investments.

Seed funding (Seed Round) has recently become popular for start-ups. In Singapore, seed stage start-ups can be funded or co-funded by Government organisations or Academic Institutions such as Enterprise Singapore, NUS Enterprise, NTUitive, SMU IIE and Temasek Holdings (it’s subsidiaries).

Contrary to the popular belief, seed funding is not all about having a great idea, it is about having a good team of people who can execute the idea.

Seed Stage Startups are generally considered to be companies with an idea, technology or service in the early stages of development.

How to approach VCs for investment

The process of approaching VCs for investment is simple and straight forward but it does require some work on your end as well as some connections in the industry that you can leverage on to get this done quickly and efficiently.

Step 1: Understand the details about VC investments

You need to understand what venture capitalists (VC) look out for in start-ups seeking seed funding before you approach them for an investment. This will give you an upper hand when pitching your business case to them and also help you save time when pitching your business case.

1. Product Market Fit — Does the product you are offering solve a real problem in the market? Are people willing to pay for your product? If yes, how much are they willing to pay? It is important that you answer these questions before approaching any investor.

2. Team — Is the team behind your start-up capable of executing the idea on time and within budget? What is their experience and expertise in the sector you are working in? What is their track record of successfully launching products or companies in the past?

3. Company Business Model — How will your business make money out of this idea or how will it be financed? It is important to understand whether there is a strong business case for your start-up since this will be a key factor in determining whether investors want to invest in you or not.

4. Market Size — How big would your market be and how big can it grow to over time? Do not try to over-estimate this figure but do not under-estimate it as well as this figure has an impact on how much capital you need as well as how aggressive your revenue growth projections should be.

5. Competition — How many competitors do you have and who are they? How does your product differ from theirs based on functionality, pricing, distribution channels, industry focus, etc.? What are their strengths and weaknesses compared to yours? What are customers’ perception about each competitor’s strengths and weaknesses compared with yours? You need to have an honest assessment of where you stand vis a vis other players in your industry before approaching any VC for investment! This is also why understanding what VCs look out for helps entrepreneurs pitch better!

Step 2: Approach potential investors through referrals from friends who have done so before

Or through networking events which brings together start-ups with angel investors and venture capitalists for networking opportunities with one another. Investors usually do not approach start-ups directly so it is important for start-ups to pitch themselves directly to angels/VCs if they want investment from them!

Step 3: Approach a few investors at the same time to increase your chances of securing an investment

Since there are many start-ups looking for funding from VCs, it is better to approach several of them at the same time and give yourself a higher chance of securing an investment. This is because most private investors or angel investors are usually very busy and have limited time to spend on start-ups.

Step 4: Do not give up after one rejection

Start-up entrepreneurs should keep at it until they get an investment. Most investors are willing to meet with entrepreneurs multiple times even if they do not like their idea or their pitch but they will not invest in them if they do not like what they see during their first meeting.

Step 5: Have a clear idea of how much money you want from each investor

Then figure out how much capital each investor has available for start-up investments. Then figure out which investor has available funds that match with how much money you want from him/her so that you can focus on meeting with him/her and only him/her instead of wasting too much time on all the other investors who have no funds available for your business.

Step 6: Do not hesitate to negotiate the terms of your investment

If you think that the valuation and other terms being offered by the investor are not as good as they could be, remember that it is a 2-way negotiation and if you want more from them then you should be willing to give them more back in return.

Step 7: Understand what your obligations are

Understand the obligations after you receive seed funding and make sure that you fulfil them quickly so that you do not waste the money received from investors.

Step 8: Lastly, make sure that your business model and plans are realistic and achievable

Do this before approaching any investor with your business idea or proposal. If an investor does not like what he/she sees during their first meeting with any entrepreneur or team, he/she will likely never meet with them again even if they want more capital down the road since many start-ups will contact him/her again later down the road for additional funding once they have successfully completed one round of funding or another.

Founder of Cudy Technologies (www.cudy.co), a full-stack EdTech startup helping teachers and students teach and learn better. I am also a mentor and investor.