By David Friedman, President , Orange County Tech Coast Angels
As an angel investor, I have been asked numerous times by entrepreneurs: when is the best time to seek seed funding? I tell them it is broken down into two parts. First, they must build awareness for their product/service/company and at the same time build relationships with potential investors. Second, only after a certain point in time, do you approach an investor with your story and pitch deck to get funding.
I believe that every founder/CEO should start the process to pitch as soon as their company is formed. That might sound early; however, I am a big believe in beginning with the end in mind and then figuring out the best ways to get to that end point. They want to build excitement, create awareness, and trust in them as the CEO who can deliver results.
Let’s put fund raising in perspective. Normally, seed funding is preceded by two other funding rounds- self-funding to get their company off to a start, followed by funding from Friends and Family. Of course, you could have a rich uncle and that would be the end of your funding needs, but that is rarely the case. During these first two elements, the entrepreneur is building the product or service and getting his or her team together. Concurrently, the entrepreneur should be competing in fast pitch competitions sponsored by schools or by an angel group such as TechCoastAngels (TCA). These competitions enable the entrepreneur to hone the crux of their story and to practice in front of fellow entrepreneurs and investors. Awareness for the company increases and the entrepreneur starts building relationships with the investor community.
I, and my colleagues at TCA, participate in events such as Wayfinder at UCI, Face to Face with Entrepreneurs, OC Startup Day, Masterminds, Expert Dojo, Black Dog Events, Quick Pitch competitions, AI Med, and San Diego Venture Group meetings among others. The investors start getting to know the entrepreneurs and over time see how their short pitch (1 to 3 minutes) evolves. At this point, investors rarely see the entire pitch deck. I initially met a company called Shoperoo about 18 months ago when they just started. I have seen them evolve, met with their founders on occasion and now they have applied to TCA for funding. I know them, like them, and trust them. I can recall many others I met and encouraged them to practice, grow their business and keep us in mind for future funding. And eventually they will apply to TCA.
These activities should take place at least 6 months prior to seeking seed funding from the first institutional investment round by angels. It provides time to refine the story, the pitch and to craft a short memorable “home base” i.e. the essence of their business upon which to build a pitch deck. During this time, the entrepreneur may approach incubators and accelerators for pre-seed funding.
Seed funding is the point after self-funding (bootstrapping) and friends and family rounds when capital is needed for getting into the market. At this point, depending on the business and market space, it might be for competition of a beta, initial tests for bio/pharma/med device, or initial commercialization. Seed funding is used to pay and grow the team, implement marketing and sales strategies, and helps set the stage for the ability to secure more funding in the future. Sources for this seed funding include:
- Venture Capital (VC)
- Corporate VC (sometimes called a “strategic”)
- Angel groups (TCA, Pasadena Angels, Life Science Angels, Sand Hill Angels, etc.)
- Individual angels or super angels (high net worth individuals or family offices with an interest in the product or the market)
In making an investment, from the perspective of angels and angel groups, these investors want to know the answers to the following questions.
- Is there a market and is it growing?
- How do you make the product/service and where is the IP?
- Do you have a unique advantage, control point or patent that creates a moat?
- What is the business model, routes to revenue and can you make money, i.e. EBITDA, over what period?
- How do you support the product/service and its growth and evolution?
- Who is on the operational team and advisory board to provide the investors with confidence, that the team can execute the go to market plan?
- How are you using your advisors to create demand for your product/service, or obtain strategic control e.g. shelf space for a consumer good, or Letters of Intent from potential buyers?
With this as background, founders are always looking for money but here is a 10-item checklist that founder entrepreneurs need to do in order to increase their chance of funding success. Do you have………
- Solid executive operational team with commitments from your CTO, CMO, COO and other executives who can execute the plan
- Strong advisory board who can make intros to potential customers or who, through their company or contacts can provide your company with differentiation or strategic control points.
- Prior input from industry and market experts that have been incorporated into your product/service offering and your go to market strategy.
- Prototype development or app completed and in the market. Make sure it works as expected.
- Relationships with other potential investors who have shown an interest in the founders and the companies. At TCA, we would love to see other trusted angel groups who have invested. At that point, TCA can potentially fast track an investment through its angel fund as well as co-investment by its members.
- A compelling story. Does the investor understand the story and is the story emotionally binding? I recall an entrepreneur presenting a new diabetes pump. He said he was doing it because diabetes wreaked havoc on his sister and he revealed an older generation pump that he had to carry on his body. It was a compelling story supported by a solid prototype. He received funding.
- Product tested, reviewed and testimonials written. Independent reviews are better than reviews on an app store site.
- Sustainable competitive advantage. There is ALWAYS competition even if it a manual archaic system that can be used. Is the advantage based on execution, first mover advantage, or patents and just as important, why do you believe you can sustain that advantage despite other well-funded competitors.?
- Demand generation and pre-sales. This goes beyond downloads and eyeballs as a proxy for results. We want to see whether the business model as specified is working in the real world and that customers are paying for your product and service as your business model expects. I want to point out that sales through crowdfunding is NOT NECESSARILY a good proxy for sales to your target market. I can say this because early in my investing career I mistakenly believed that is was evidence of a market. That investment went to zero within 2 years.
- Practice pitching by the founder/CEO or at least the senior member of the operational team in conjunction with the founder. The number one reason for investing is the belief and trust in the founder and CEO and that is why we want to hear from him or her.
Without funding, companies cannot be successful. Seed funding is critical because it is the initial capital that sets the foundation for growth and future funding. Prepare for your seed round at least 6 months prior to sending your pitch deck to investors. And even after your seed round, 6 months prior to your next round, start your preparations. Founders should not seek funds out of desperation because they ran out of cash. Plan ahead and time the next round to a technical, market, business partnership, or financial event.
We look forward to seeing the entrepreneurs at events in our eco-system. Better yet, we would love to invest in you the founder and your company and perhaps, together, we will build the next Green Dot, Savara, Parcel Pending or other highly valued company.