What VCs look out for in Seed Rounds
The VC’s (Venture Capital/Venture Capitalist) decision to invest in start-ups is based on a variety of factors. The management team, the market opportunity and the growth rate are some of the primary factors.
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).
Seed Rounds are also funded by Angel Investors or Venture Capital firms who invest in them because of their passion for technology as well as their connections to the start-up’s industry or geographical location.
Seed funding can be provided by both private investors and government agencies, depending on the type of business or product being developed.
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.
Some start-ups also engage in what is called “crowdfunding”. It is a way to raise funds for their business ideas by getting small investments from a large number of people. The two most popular crowdfunding platforms are Kickstarter and Indiegogo.
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.
You will be able to articulate better which aspects of your business they should focus on while giving advice on how they should improve their business model or product offering based on insights gained from their past investments in other start-up companies.
In short, understanding what VC looks out for helps you “pitch smarter” rather than “pitching harder”!
Here are five things that an entrepreneur should know before approaching any investor
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!
If you don’t know any investors personally, then look them up online via websites such as Crunchbase or AngelList so that you can research them before approaching 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.
And since they have limited time to spend on your business, it is better to give yourself more opportunities by approaching more than one investor at the same time so that you can secure an investment faster. But do ensure that you are being honest about what you’re pitching to them!
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.
It is important that start-ups keep trying until they find an investor who gives them money, especially if the amount of capital required is smaller than USD$500,000 (which typically qualifies as seed funding).
There are many start-ups who have failed after pitching 50–70 times to different investors but when they finally got it right and found someone willing to invest in them, they were able to succeed big time with their business ventures!
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.
Many investors will refer entrepreneurs who want less than USD$500,000 (representing seed funding) to Government organisations such as Enterprise Singapore or NUS Enterprise instead since these organisations do provide such small amounts of capital sums without taking a stake in the company. These smaller sums help new businesses get started quickly while allowing existing businesses expand their operations quickly.
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.
The ideal situation is when the value of the company increases over time due to successful execution of the business plan, allowing you to sell it for a higher price (or get an even higher valuation) when you are ready for a series A Round of funding.
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.
These obligations include filing annual reports, making progress reports on how their money is being spent, etc. It is very important that start-ups understand this so that they can immediately get started on fulfilling these obligations after receiving any investment.
Start-ups should also understand that investors generally expect a return within 5–7 years or less so it is important for entrepreneurs who receive seed funding to make sure that they have sufficient runway (i.e. time) to generate profits after their initial investment so they can return this money back to investors within a reasonable timeframe.
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.
This means that it is extremely important for entrepreneurs to convince investors during their pitch meetings by giving clear examples of how they plan on executing their business model (because if an entrepreneur cannot clearly explain how he/she plans on executing his/her business model during these meetings then chances are high he/she will not be able to execute his/her business model later either!).
Do not underestimate this aspect — having clear plans about how you are going to execute your business model is extremely important since many investors do ask questions about this during subsequent follow up meetings since most businesses fail due to execution challenges rather than due to market issues or other reasons.
In summary, start-ups and entrepreneurs who seek seed funding should be able to clearly explain their business model and plans during pitch meetings with investors, especially since they are seeking their first round of funding.
Start-ups should also understand that the more they can give to investors then the more they will get back from them later on down the road as well since many investors like to invest in companies that give them a high return on their initial investment so that they can then do this again later with other companies as well.
About the Author
I am the 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 angel investor in other Startups of my other interests (Proptech, Fintech, HRtech, Ride-hailing, C2C marketplaces and SaaS). You can also find me on Cudy for early-stage Startup Founder mentorship and advice.
You can connect with me on Linkedin (https://www.linkedin.com/in/alexanderlhk) and let me know that you are a reader of my Medium posts in your invitation message.