This is part of a series focused on raising the first batch of cash to finance your cool idea. When should you get seed capital? How much should you raise? Who should you got to for the capital? How do you value your startup?
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When should you get your seed capital?
That is a question I am often asked by first-time entrepreneurs. Here is what I have found works:
- Get startup seed capital like you plan a vacation. Get your seed money after you have your idea converted to a written plan. Sure, it's fun to spontaneously rush off to "somewhere" on a vacation, but you'll find a lot of disappointment using that method (no hotels, bad season for that location, too much driving, an emotional letdown, too expensive, etc.). Startups done with spontaneous money raising are similar. Instead, I suggest you document your idea in at least a four page business plan before you think about getting seed capital. Serial entrepreneurs will also forecast 24 months of cash spending and three more years to complete the set of financial statements. The prepared founder gets the money. VCs in today's cautious startup money markets look for planned startups. It reduces their work load and the risk of the startup.
- Get start money like you would buy gas for your car to go on a vacation. You will get your gasoline close to home. You'll purchase the quality you think best for your vehicle. You'll shop for the best price, but not too long. Startups run by serial entrepreneurs do the same. They find investors in the area they live in (preferably an hour car ride away, or at least reachable to and from easily the same day via car). They decide on the quality of investor they want (wealthy friend, famous angel, rich farmer, world-class venture capitalist, local banker). They get investors competing for their round of financing, they do not settle for a single bidder. They aim to get the financing done within six months of effort. That method produces a quality seed financing.
- Pick a date as close as you can to launching your product or service. The closer you are to launching your first product, the less risk there is to your investors. That attracts more investors. That reduces the cost of the money charged by investors (percent of your company they will expect to own). This may not be what you want to hear. You may need cash to live on while preparing the first business plan. But you may have to prove the concept behind your idea is viable before investors will respond with interest. That is why budding entrepreneurs save enough to live one year without any income. To settle the when decision, I suggest you test your idea on one or two investors in an informal discussion. "I have an idea for a startup, I'd like to have your thoughts about how far I should advance it before raising my seed round." I've found quality investors do that very often. They like to see the newest ideas, meet fresh entrepreneurs, and be among the first to see a cool new idea.
- Have your core management team ready. This is the most powerful thing you can bring to an investor. A core team of qualified leaders who can work together well is a price sought after by seed investors of every kind. I cannot emphasis this enough to you. If two other managers are eager to join your startup, investors have less risk of things going wrong. Veterans of startups believe your choice of such talented people distinguishes you from the crowd. It greatly increases the value of your idea.
BOTTOM LINE: Think carefully about when to raise your seed round. You may find you have to do a lot more work on your idea before proceeding to find the cash. When you pick the best time to raise the precious capital, you will be well on your way to building an unfair competitive advantage.
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Next: "How much should you raise for your seed round?"
That's an inspiring post!
It will be included in next week's theStartup weekend reading :)
Posted by: Stefano Bernardi | Tuesday, 21 July 2009 at 05:53 PM