By Will Klippgen & Michael Blakey
Cocoon Capital is primarily providing “seed funding” for tech companies within fintech, SaaS and e-commerce. This funding is generally in the range of SGD $500k to $1m and is supposed to let the company run without further cash injection for at least 18 months. What is the right time to raise seed capital? And what do you need to prepare before getting in touch with investors? This post will try to address both of these questions.
When should you raise seed capital?
Most startups are self-funded in the first year or so with additional capital often raised from friends, family and supportive business angels. These first, high-risk months typically move your startup from a very theoretical idea into concrete plans that are put to work, and which ideally result in a minimum viable product (MVP). The MVP has ideally been taken around to multiple, potential future customers and a range of feature requests or even new product and service requests have been fed back.
At a certain point, you find that you need to hire some new engineers, a product lead, and you are fed up of sleeping on couches. This is typically the time we believe most founders should raise their seed round. In many cases, your business angels can provide the financing. In many other cases, the risk appetite of your existing angels might have been met, and it is time to look for investors that are used to write slightly larger cheque sizes. (I can’t believe I used the word “cheque” in 2016).
Fundraising takes time, whatever the amount, so we really advise you to raise enough for 18 months of operations. The phrase “you should always be fundraising”, is often misunderstood by many entrepreneurs. It basically means you should be always looking for investors that are interested in what you’re doing and looking to build a relationship with them. But actual fundraising should be done as rarely as possible!
When investing in early stage companies there is little reliable data that the investor can use to make their investment decision. This means that a large proportion of their decision making process is based around their confidence level in the ability of the founders. It’s much easier for them to make a decision and take a chance if they’ve got to know the team in greater depth.
Short answer: Raise seed capital 6 to 18 months after founding your company, and after your friends, family and first business angels have filled their investment appetite and after you have a minimum viable product you can show to future customers (and future investors).
What should you prepare before contacting investors?
The rule is basically that the more money you raise, the more preparation you need to do. Seed investors are used to early-stage startups, and are not as detail-oriented as their Series A investor colleagues, but you need to provide a minimum of documentation and information as follows:
- A business deck (Slides are OK) explaining the problem you are addressing, how you solve it, the size of the market opportunity, your revenue model, and who you and your team are.
- A properly formatted profit and loss forecast for the next 2 years. The most important part of the forecast is a separate sheet explaining your assumptions, as the value of your forecast is more in how you arrive at your figures, not so much the figures themselves.
- Your incorporation documents and management accounts from founding till now.
- A general idea about how much money you need to raise, when and how you want to spend it, and how much equity you are willing to part with.
Short answer: You need a business deck, 2-year financials and an idea of how much you want to raise and at what valuation.
How to choose the right investors?
Lastly, we wanted to say something about choosing investors. This is a topic where we are certainly biased, but we’ll say something anyway. We believe the best investors might not be the most accessible, they might not be the ones giving you an easy time in meetings and they might not give you the highest valuations. Basically, we think that good investors can be spotted as follows:
- Good investors are respectful and humble, but they will ask you hard questions, and you might feel challenged answering them. You might even come out of a meeting feeling you need to change certain parts of your plan.
- Good investors will never tell you what you should do or what you should have done. Instead, they will suggest alternatives to you, including strategies for how to make the right decisions when there are multiple options on the table.
- Lastly, we believe good investors will not always give you the best pre-money valuation for your company. Inexperienced investors are often preferred by first-time founders, as founders value their shareholding percentage higher than the quality advice from investors. There is no right and wrong here, but we believe that good investors can have a significant impact on the future success of startups.
- Always do due diligence on the investors and the best way to do this is to reach out to some of their portfolio companies and talk to the founders.
© 2016 Cocoon Capital Partners. All Rights Reserved. We are happy to let you reprint this article if it is attributed to us and linked back to this website.