How do you get VC funding for an early-stage startup? Jemima Bunbury of Founders Intelligence spoke to Michael Stothard, Principal at firstminute capital, to share seven guiding principles for raising Seed stage investment.
While new startups face a tricky investment environment right now, VC money is still out there, waiting to be deployed
US VC investors are sitting on $290b, while European VCs raised over $25b in 2022. Great companies with sustainable business models will get venture funding.
In conversation with Michael Stothard, Principal at firstminute capital, Founders Intelligence have drafted up seven key principles to help guide early-stage founders on their fundraising journey:
1. Present Proof to VCs that your Idea is Validated
There are many ways to show proof of concept. At Seed stage, VCs are looking for early proof that your hypothesis is correct. They want to know the problem you are solving is real and that you understand your customer. You don’t need to have all proof points fully validated, but the more you do the greater confidence you build in the investor.
Revenue: Show you already have paying customers.
Research: Present your customer research. This might take the form of interviews, surveys, or other forms of customer insight. The more customers, the better. This doesn’t need to be complicated – a notion page with customer names, profiles and details will do the trick.
2. Show VC Investors that Others have Already Opened their Pocketbooks
VCs are looking for signals. And one great signal is that some well-respected angel investors or operators have already backed the company. That’s a sign that the founder team is impressive enough to convince serious people, which is a good start!
3. Create Confidence that You’re the One for the Job
At an early stage, investors are likely looking most of all at the team. Does the founder have a unique insight into a real problem? Are they motivated enough to go on a 5-10 year journey? Will the team work well together? And will the founder be able to hire well?
Create confidence that you can navigate these changes and that you’ll be the right person through that journey: a bad team can screw up a great idea; a great team will often be able to execute on an ok idea or pivot to something brilliant.
Sales Acumen: Show that you can articulate the simple stuff: who is your customer, why do they want and need what you are creating, will there be lots more customers, and how do you plan to scale?
Star Power: VCs look for your ability to convince others and will perceive your advisors and angels as a great proxy for your persuasiveness. Angels themselves are a proof point that you have magnetism.
CV and Experience: If you have relevant expertise, bring that to the forefront of your story, emphasising how your experience gives you a unique understanding of the problem and solution.
Team Synergy: Be clear on why you are obsessed with the problem and why you have chosen a specific set of co-founders or team members. Prove to the VC that your relationships with them are solid – VCs know that when times get tough, relationships will get tested, so strong bonds are key.
Co-founders: In an ideal world, VCs like to see a technical co-founder, not just someone hired to do the job. Think carefully about how you choose a co-founder (if you have one or want one).
Speed: VCs like founders who move fast, test, iterate, and develop rapidly. Speed of execution is key: the ups and downs will require navigating change at speed.
4. Be sure that you want VC Funding
VC money is not for everyone. Think about whether you need venture capital. Do you aspire to build a unicorn? VCs are looking for founders and ideas that could be their next billion-dollar portfolio star.
If you want to move more slowly without the pressure of 1000x-ing your business, consider other forms of funding. But, if you want to raise $500k with a pitch deck, you will probably need the higher-risk financing that VCs provide.
5. Lean into your Network for Warm Intros to VCs
VCs get flooded with founder pitches and connections. How can you stand out? The best way to do this is to find a way to get a warm intro: getting introduced by a common connection who is credible in the eyes of the VC makes a huge difference. Warm introductions are not essential, but are useful catching a VC’s attention.
6. Focus on the Right Financial Indicators
While you might think your financial model will make or break the deal, it’s unlikely to be the deciding factor in a VC’s assessment at the very early stage.
Don’t focus too much on valuation at early stage either; think about how much you need to raise to give you sufficient runway to reach your next milestone. In this macro-environment, err on the side of a 24-month runway if you can reach it, but 18 months minimum.
When fundraising, think about the dilution you are willing to take – ideally somewhere between 15-25% (and no more!). If you don’t have sufficient equity, there might not be enough to make it worth your time in later rounds.
This will mess up your CAP table and give off the wrong signals to investors who might question your judgement. VCs see founders diluting early as a red flag.
7. Evaluate VCs as Diligently as they Evaluate you
VCs like to know they can add genuine value – through their expertise, network, and financial support.
Before raising a round, scout the VC landscape to determine the partners you believe are best aligned with your vision and mission, or who can provide the expertise and support most aligned with your needs. Speak to some of the portfolio companies of the funds to see how they really work with founders.
Raising VC money? The home of magnetic ambition, firstminute capital is a $350m AUM venture fund investing in seed stage companies and world-class community of entrepreneurs.
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