Early Stage Seed Round Financing (Pre-Revenue)

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What a mouthful, but what it really means is that you have a great idea, have done good primary and secondary research, have put some money in the business – essentially you have put a lot of effort and thought into the business idea already.

You are not at the point where you can bring in revenue, but you have a good plan, and now you want to share it with the world with the intent to raise some initial money to ‘take it to the next level’.

A Seed Round, according to Wikipedia, is a form of securities offering in which an investor invests capital in exchange for an equity stake in the company. The term seed suggests that this is a very early investment, meant to support the business until it can generate its own cash flow or until it is ready for further investments. Seed money options typically includes friends and family funding, angel funding, and crowdfunding.

In my jurisdiction, you can raise money from 50 family and friends. It sounds like a lot, and you can bet that some of those will be very loosely called friends. Some say that raising seed money from family and friends should be easy, after all they know and trust you, unless you have completely fooled yourself into thinking your business has merit. It wouldn’t be the first time that someone has gone to family for money, and they laughed them out of the house.

The thing you must understand when looking at family and friends for seed capital is that at the end of the day they still are possible investors. You better have your ducks in a row to make a proposition to the people closest to you for money. It is incumbent upon you to protect their investment with wise decisions.

There is a lot of discussion as to what a business needs in order to wrestle money from the hands of prospective investors. Some have gone so far as to say that they invest based on the personality of the business owner, others have said investors don’t need documents they need information.

Having said that, of course, investors need information, but it has to be succinct and credible information that isn’t BS.
Some of the things I suggest are important to an investor are:

A non-disclosure (NDA) Agreement for investors to sign to protect your assets. An NDA has been said to protect honest people because unscrupulous people will simply ignore it once signed. The very least an NDA does is to show the startup that the investor is serious enough to look at the opportunity.

At least a 2-page executive summary (if not a full business plan) with whom, what, where, why & how much you need. You need to include an overview of the industry and what issue your product or service addresses. Lately, I’ve been seeing more people looking at the pitch deck than a full business plan.

A pitch deck is important for a fast look at the business and is essentially a nice PowerPoint sales presentation. If you make a pitch deck, make sure it is in bullet form with great images and is professionally done. There is nothing worse than having a presenter read the presentation. Many pitch decks have closed the deal.

A SWOT analysis helps an investor know the strengths, weaknesses, opportunities and threats of the business. You can be sure an investor will find your weaknesses in a flash, so being prepared with a SWOT and ways to mitigate your weak points will alleviate investor fears.

Financials; conservative estimates of possible revenues and expenses. A prospective client gave me financials the other day with the hopes of a $2M investment on no revenues. The first thing that struck me was the four glaring mistakes on the spreadsheet, totaling about $500k – ouch! They forgot to include their salaries in the costs, among other mistakes. Secondly, the amount they wanted seemed arbitrary in that their operational numbers seemed out of whack for a startup. It seemed their most expenditure was for lawyers – next?

Alternatively, you as the founder looking for money should be aware that it is important for you to be comfortable with an investor. I have turned down investors because they didn’t have the same vision as me and/or they failed my due diligence process.

Just as an investor will check you out, it is totally in your right to assess them by searching Google, social media and asking the right questions. If you have a gut feeling about the investor, it is best to move on.

If you feel you are at that point in your business growth that you need help to structure it, brainstorm with people you trust and ask for help to make the right decision. In a heartbeat, you can grow exponentially or fail miserably because you took the wrong advice or hooked up with the wrong investor.

Gary is CEO of Bizzo Management Group Inc., VanAsia Capital Corp., and Bizzo Integrated Marketing Corp. in Vancouver. London-based Richtopia placed Bizzo on the Top 100 Global Influencers in the World for 2018. He is an Adjunct Professor of Integrated Marketing & Communications, as well as, Consumer Behavior at the New York Institute of Technology, MBA School of Management (Vancouver Campus). Gary can be reached at ceo@garybizzo.com

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