This document provides an overview of raising seed capital. It discusses factors to consider before raising seed capital, sources of seed capital like accelerators and angels, what seed investors look for, typical valuation and deal terms, how to find seed investors, the seed stage due diligence process, and questions for entrepreneurs. The document aims to guide entrepreneurs through understanding the seed funding process.

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INSIDER’S GUIDE
TO RAISING SEED CAPITAL

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T H E S E E D - S T A G E F U N D R A I S I N G P R O C E S S
Unfortunately Raising Seed Capital
is Not this Simple
S o u r c e : D i l b e r t

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A G E N D A
▸ Factors to consider before raising seed capital
▸ Sources of seed capital: accelerators, angels, angel groups, and VCs
▸ What seed investors are looking for
▸ Valuation and terms of seed rounds
▸ How to find seed investors
▸ Seed-stage due diligence
▸ Questions for entrepreneurs to ask seed investors
▸ Appendix

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▸ Cash Curve: What are the projected capital needs of your business? How much capital does your
business require over the next 18 to 24 months?
▸ Minimizing Dilution: Consider how you can minimize equity dilution in the early days. Can you
stage your capital raises to be able to raise more capital upon the achievement of future
milestones?
▸ Valuation and Terms:
▸ Will you raise via a convertible note or priced round?
▸ What percentage of equity are you willing to sell?
▸ Investor Value-Add: What key skills do you want your seed investors to bring to the table? For
example:
▸ Industry expertise and connections
▸ Ability to help with hiring
▸ Ability to provide strategic advice
The answers to all of these questions will drive your seed capital raise
F A C T O R S T O C O N S I D E R B E F O R E R A I S I N G S E E D C A P I T A L

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A G E N D A
▸ Factors to consider before raising seed capital
▸ Sources of seed capital: accelerators, angels, angel groups, and VCs
▸ What seed investors are looking for
▸ Valuation and terms of seed rounds
▸ How to find seed investors
▸ Seed-stage due diligence
▸ Questions for entrepreneurs to ask seed investors
▸ Appendix

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Accelerators Solo Angels Angel Groups/Networks Early-Stage VC Funds
Examples 500 Startups
Techstars
Y-Combinator
Industry veteran
Former entrepreneur
Your auntJoanne
NY Angels
Astia Angels
First Round Capital
Lerer Ventures
645 Ventures
Level of Investor
Sophistication
Varies; elite
accelerators are
sophisticated
Varies significantly Moderate to high level of
sophistication
Highly sophisticated
Typical
Process
You apply to the
accelerator,they
interview your team,
they accept or reject
your company
You get introduced to
the angel,the angel
does their due
diligence,the angel
writes a check or
passes
You apply,you presentto
the group,they do due
diligence,the members
jointly decide if they will
invest
You get referred to the
fund, you meet them
multiple times, they do
due diligence,they
invest or pass
Terms Lower valuation Terms are most
entrepreneur-friendly
Depends on angel group Less entrepreneur-
friendly;seeking greater
control
Value-Add Generally helpful Depends on the angel Moderate value-add Generally high value-
add but will vary
Investment
Amount
$25k to $75k Is
rough ballpark
Varies widely;
ballpark range of
$25k to $100k
$100k to $250k $250k to $1m at seed-
stage
S O U R C E S O F S E E D C A P I T A L

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V E N T U R E C A P I T A L I S T S
S o u r c e : D i l b e r t

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▸ VC firms are dedicated pools of capital with professional management that focus on a
specific stage and type of investment (for example, early-stage software)
▸ Keep stage and sector focus in mind as you assess which funds might be a good fit
▸ VC firms are typically made up of partners, principals/VP’s, and junior teams
▸ Partners and principals will lead deals, associates/analysts will primarily help with deal vetting
and due diligence
▸ Most VC firms have an established process by which they source and evaluate deals
▸ Typical seed-stage venture process:
▸ You get referred to the venture fund, or you send in a business plan
▸ Initial phone call/meeting where you present your business
▸ If the fund is interested, this is generally followed by one or multiple follow-up meetings
▸ A term sheet is presented. You negotiate the terms – valuation, investment amount, security,
etc.
▸ You close the deal
O V E R V I E W O F V C F I R M S

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▸ Pros and cons of raising money from venture capital firms:
PROS:
▸ Venture firms typically invest larger amounts of capital than solo angels/angel groups
▸ Venture firms are generally well-connected, with ability to help with hiring, strategic
partnerships, business strategy
▸ An investment from a good fund can be good validation to the industry/potential
customers
CONS:
▸ They generally desire more control rights/protections: preferred stock, blocking rights,
board representation
▸ Questions to ask venture funds:
▸ What types of deals does the firm specialize in? Have they invested in similar companies
before?
▸ What is the firm’s typical deal process: timing, decision-making, due diligence requests?
▸ Which partner/principal at the firm will I be working with?
▸ What is the firm’s typical approach to follow-on investments?
O V E R V I E W O F V C F I R M S ( C O N T ’ D )

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Rules of Thumb:
▸ Everyone pitches differently. Be yourself and present your company in the way in which
you feel comfortable.
▸ For an elevator pitch, be able to explain what your company does and its value
proposition in a concise way, ideally in a few sentences.
▸ What problem is your business solving?
▸ How do you solve that problem?
▸ If you solve that problem, why will that result in a large business?
▸ Think about what questions the investor is likely to have, and have answers prepared
ahead of time for those questions
▸ Don’t make wild claims/projections that you can’t support – prospective investors will
see through those sooner or later
R U L E S O F T H U M B F O R Y O U R I N V E S T O R P I T C H

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First call/meeting:
▸ This is really a “get to know you” session. The investor is trying to get a read on your
company and whether it is a fit for their fund. Provide your company teaser/executive
summary deck and use it as a guide. Expect to get interrupted frequently with questions.
You can also use this session to size up the venture investor
▸ Materials to prepare: Company teaser/executive summary that is 10 slides or less, that
you can send to prospective investors before the meeting and use in your initial meeting
Second meeting and subsequent meetings:
▸ There will likely be more people from the venture fund in the room if you get to
subsequent meetings. Be prepared to go into more detail in these meetings
▸ You may be asked to present to all of the firm’s partners or a subset of the partners
before they sign a term sheet. This may happen in a second or later meeting, depending
on the firm’s process
▸ Materials to prepare: More detailed business plan/investor memorandum that you can
use for the more detailed pitch meetings. 20 slides is a good rule of thumb
T H E V C P I T C H P R O C E S S

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A G E N D A
▸ Factors to consider before raising seed capital
▸ Sources of seed capital: accelerators, angels, angel groups, and VCs
▸ What seed investors are looking for
▸ Valuation and terms of seed rounds
▸ How to find seed investors
▸ Seed-stage due diligence
▸ Questions for entrepreneurs to ask seed investors
▸ Appendix

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▸ Team: Who are the founders, and what are their backgrounds? Why are they well-suited to
addressing this particular market opportunity?
▸ Value Proposition:
▸ What problem is your company solving, and why is it important?
▸ Why is your approach to solving this problem either better/faster/cheaper than
alternatives?
▸ If you solve this problem, how large can your company get?
▸ Product: What is your product development plan? If you are pre-product today, when are you
planning to release the product?
▸ Competition: Who is your competition? How are you differentiated?
▸ Market:
▸ How large is your market?
▸ What segment of the market is addressable by your product/service today?
▸ Financial Plan:
▸ What is your revenue and cash burn plan for the next 18 to 24 months?
▸ Funding: How much capital do you plan to raise, and what is the use of proceeds?
W H AT S E E D I N V E S T O R S WA N T T O K N O W

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▸ Companies that raise from angel investors:
▸ Sectors: Angel investors will invest in a broad range of tech and non-tech companies: for
example, Internet, software, consumer products, biotech, hardware, real estate, etc
▸ Potential exit: Angel investors are looking to make money but do not necessarily require
large exit potential
▸ Companies that raise venture capital:
▸ Sectors: VC firms will generally seek companies with a technology component that have
the potential to scale rapidly. Key sectors include software, mobile apps, online
marketplaces/e-commerce, biotech, and newer technology areas (VR/AR, blockchain, etc)
▸ Scalability: VC firms seek large market opportunities (ideally greater than $1B market size)
that can lead to large potential exit
▸ Proprietary technology: VC firms seek companies that have proprietary technology that is
difficult to replicate
▸ CapEx: VC firms typically seek to avoid companies with large ongoing capex needs
▸ Laws of Technology: Ideally a business can benefit from one or multiple laws of
technology, such as Moore’s Law or Metcalfe’s Law
T Y P E S O F C O M PA N I E S T H AT R A I S E S E E D C A P I T A L

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▸ No hard and fast rules: Financial expectations will vary depending on the type of seed
investor
▸ Accelerators and angels may invest pre-revenue or even pre-product
▸ Some seed VC firms may invest pre-revenue
▸ Financial expectations for companies with traction
▸ Rapid growth: Seed VC firms are looking for rapid growth potential
▸ Mobile Apps/Digital Media: Ability to reach 500k to 1 million unique users within the
first 18 to 24 months after launch
▸ Software: Ability to reach $1 million of revenues within first 18 to 24 months after
launch
▸ Internet/E-commerce: Ability to reach $2 to $5m of gross revenues within 18 to 24
months after launch
▸ Quality of business model: Discerning investors will look for strong business models
▸ High gross margins: Greater than 70% gross margins for software companies
▸ Strong unit economics; attractive return on marketing and sales spending
▸ Recurring revenue models
F I N A N C I A L E X P E C T AT I O N S O F S E E D I N V E S T O R S

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A G E N D A
▸ Factors to consider before raising seed capital
▸ Sources of seed capital: accelerators, angels, angel groups, and VCs
▸ What seed investors are looking for
▸ Valuation and terms of seed rounds
▸ How to find seed investors
▸ Seed-stage due diligence
▸ Questions for entrepreneurs to ask seed investors
▸ Appendix

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VA L U AT I O N A N D T E R M S
S o u r c e : D i l b e r t

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Valuation
▸ Much more art than science
▸ Having a finished product, customers and revenues will increase your valuation
▸ Valuation ranges for seed companies can range from $1m to $7m
▸ VCs generally valuing between $3m and $7m for seed companies
▸ How seed investors determine valuation
▸ Venture capital valuation method:
▸ Project out financials for 5 to 10 years
▸ Apply revenue or EBITDA multiple at future exit
▸ Discount back to the present
▸ Multiple of current revenue method for companies that are generating revenue
▸ How to negotiate valuation:
▸ Be prepared for some back and forth with investors
▸ Both valuation and terms are important. Consider convertible preferred vs. participating
preferred security, as an example
VA L U AT I O N

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▸ Form of security:
▸ Convertible note: Debt-like security, carries interest rate, will convert to equity upon raising a
priced round
▸ Pros: A bit easier to raise
▸ Cons: Defers valuation question, interest can accrue
▸ Equity round: Fixed valuation and ownership
▸ Pros: No ambiguity about dilution
▸ Cons: Requires lead investor
▸ Investment Amount:
▸ What equity ownership are you willing to give up?
▸ Raise enough capital to give you runway (with a cushion) to reach key milestones for 18 to 24
months
▸ Think about the cash curve – how much cash do you need to reach break-even?
▸ Control Rights and Board Seats:
▸ Think about whether you are willing to give up a board seat; VC’s may insist on a board seat
▸ Other rights include pro-rata rights, approval right on future sale, etc
K E Y D E A L T E R M S

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▸ The capitalization table governs the following characteristics:
▸ # of shares, and percentage of equity, owned by founders, employees, and investors
▸ The form of security owned by each individual or group (e.g., common or preferred stock,
stock options, etc)
▸ When each investment round was made, relevant terms that impact ownership (for example,
interest rates)
▸ Companies should manage their cap tables and be able to provide them to investors
▸ Some companies use tools like eShares to manage cap tables online
▸ Seed investors look for the following in cap tables:
▸ “Clean” cap tables without a lot of onerous terms that complicate future exit
▸ Employee stock options pools that have already been factored in
▸ Balanced ownership between company founders
C A P I T A L I Z AT I O N T A B L E S

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A G E N D A
▸ Factors to consider before raising seed capital
▸ Sources of seed capital: accelerators, angels, angel groups, and VCs
▸ What seed investors are looking for
▸ Valuation and terms of seed rounds
▸ How to find seed investors
▸ Seed-stage due diligence
▸ Questions for entrepreneurs to ask seed investors
▸ Appendix

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Accelerators and Angel Groups:
▸ Most have online applications where anyone can apply
Angels: Targeted Angelist searches:
▸ Identify companies in your general sector that have reached successful exits, that would
be good comparables for your business
▸ Pull up the Angelist profiles for these companies, and determine who their first seed
investors were
▸ Use LinkedIn to determine how you are connected to these investors, and get warm
introductions
VC Firms:
▸ Use LinkedIn to determine if you are connected to one of their portfolio founders
▸ Identify mutual contacts and seek warm introductions
General Advice
▸ Attend relevant events where seed investors are present (for example, Angelvine)
▸ Leverage your university/graduate school network
H O W T O F I N D S E E D I N V E S T O R S

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A G E N D A
▸ Factors to consider before raising seed capital
▸ Sources of seed capital: accelerators, angels, angel groups, and VCs
▸ What seed investors are looking for
▸ Valuation and terms of seed rounds
▸ How to find seed investors
▸ Seed-stage due diligence
▸ Questions for entrepreneurs to ask seed investors
▸ Appendix

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▸ Due diligence is an opportunity for seed investors to validate their key assumptions and make
sure there are no surprises
▸ Typical due diligence requests:
▸ Requests to speak with your customers
▸ Detailed diligence on your product/service (e.g., product demos)
▸ Management team reference calls
▸ Detailed financial projections and discussion around key growth assumptions
▸ Total addressable market (TAM) discussion and analysis
▸ Review of sales and marketing plan
▸ Key suggestion: Make more information available to investors as you qualify their level of interest;
don’t waste time with investors where you are not in their sweet spot
S E E D S T A G E D U E D I L I G E N C E

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A G E N D A
▸ Factors to consider before raising seed capital
▸ Sources of seed capital: accelerators, angels, angel groups, and VCs
▸ What seed investors are looking for
▸ Valuation and terms of seed rounds
▸ How to find seed investors
▸ Seed-stage due diligence
▸ Questions for entrepreneurs to ask seed investors
▸ Appendix

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When it comes to venture firms, the quality of the investor can have a major impact on your future
success. The following are questions to ask yourself as you evaluate a prospective venture capital firm:
▸ Do I get along well with this person/group? Do I get a good vibe from them? Would I want to
work with them when times are tough?
▸ Do they understand my business? Are they asking the right questions?
▸ Will the investor provide references? If so, what do the references say about the investor?
▸ What is the firm’s track record? Have they invested in similar companies? Have those
companies been successful?
▸ What relevant connections does this investor have? Can they introduce me to people that can
help me?
▸ What is the firm’s reputation in the marketplace?
▸ What is this investor’s time horizon to exit? Does the firm typically provide follow-on
investments?
▸ Does the firm tend to support its portfolio companies when things don’t go well? Consider
speaking with references at less successful portfolio companies
Q U E S T I O N S F O R E N T R E P R E N E U R S T O A S K S E E D
I N V E S T O R S

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APPENDIX

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Accelerators provide a combination of capital, mentorship, and coaching to early-stage startups that
can be very valuable in the early days
▸ Prominent accelerators include YCombinator, 500 Startups, and Techstars
▸ Companies accept one or multiple cohorts per year, the companies complete the program
over a period of months, after which there is a demo day that is attended by prospective
investors
Pros and cons of accelerators
▸ Pros: Invest at the earliest stage of company development (idea stage); can be an alternative
to angel capital if you don’t have a strong network; will expose you to VCs; can help build
your team and refine business model
▸ Cons: Typically invest at lower valuations than angels/venture funds
Typical accelerator investment terms:
▸ Fixed valuation, e.g. $75k investment for 7% equity ownership
▸ Some accelerators may seek pro-rata right to invest in later rounds
O V E R V I E W O F A C C E L E R AT O R S

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Angel investors vary widely in terms of their sophistication, average investment size, and
their goals of an investment
▸ Some do it for fun, some are professionals.
▸ Angels can vary from a wealthy former entrepreneur who likes working with early-stage
startups, to your wealthy aunt Joanne who always believed in your potential
Pros and cons of raising money from angels
▸ Pros: Less restrictive terms and less formality than VCs, easier deal process, more subjective
investment rationale
▸ Cons: Low to moderate value-add, smaller average investment than angel groups and venture
funds
Typical angel investment terms:
▸ Convertible note structure (with discount to price of future equity round)
▸ Minimal control rights, generally not seeking board seat
How to find them:
▸ Leverage your personal network
▸ Do targeted Angelist searches
▸ Attend angel events (Angelvine in NYC is a good example)
O V E R V I E W O F A N G E L S

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How angel groups work:
▸ Angel group members generally pay a fee to join the group and get access to deals
▸ Angel funds often specialize in certain types of investments (for example, Astia Angels focuses
on female-founded companies
The angel group investing process:
▸ The staff at the angel group will vet inbound business plans and choose companies to present
to the full group
▸ After you present, the group will conduct due diligence and decide on the deal
▸ They may present you with an independent term sheet, or sign on to a term sheet that you are
already using
Angel group pros and cons:
▸ Pros: Larger average investment than individual angels, may have large professional networks
that you can utilize, may have strong connections
▸ Cons: Longer diligence process than solo angels, can be slow-moving
O V E R V I E W O F A N G E L G R O U P S