How to Prepare Your Startup for the Seed Stage: 4 Points to Consider

With the increased competition, capital constrained investors and high cost of capital in the current startup funding ecosystem, it is no surprise that more and more startups are choosing to raise a seed round instead.

While raising capital for the seed stage can take longer than other rounds, the benefits of doing so are huge. A seed round gives you time to test your idea, iterate on it and validate assumptions before going full throttle with a venture capital (VC) or institutional investor (e.g. pension fund).

But as a seed-stage company, you can’t just raise your hands and wait for VCs to come knocking at your door. Instead, you have to think about how you can stand out from the rest and make sure your company gets the most out of its limited capital.

With this article, we will cover some key considerations that should go into planning your startup for the seed stage; with a focus on identifying pitfalls that could sabotage your fundraising efforts while also outlining actionable steps you can take now to ensure greater success when raising future funds or scaling up as an enterprise company.

1. Define and Test Your Minimum Viable Product

The simple truth is that no investor will fund your idea until they see how it works. Before you approach anyone about funding your company, you need to get a clear understanding of where you are, where you are going and what you are shipping to customers.

This will be tough in the early days but it is essential to building a strong first impression. Start by dissecting your product and determining the core value proposition of your product.

Next, identify the pain points of your target customers and map those pain points to the core value proposition of your product. You can conduct customer interviews to learn about their pain points.

Finally, determine how your product satisfies one or more of the customers’ pain points and maps that to a measurable impact on the customer’s life. Once you have a thorough understanding of what you are building and the key use cases of your product, it will be easier to decide which investors you want to approach.

Investors in the seed stage look for a clear and well-defined Minimum Viable Product (MVP), it is essentially the skeleton of your business and serves as a foundation for scaling your company.

It is important to keep in mind, however, that this is not an MVP that you would ship to customers; it is the MVP that you would build to test your hypotheses. Therefore, it is not meant to be feature-rich, but rather enough to understand the core value proposition of your product and how it works.

2. Decide whether your product is scalable or not

While it is tempting to raise a round for any product idea, the reality is that a majority of early-stage companies fail because their products do not scale.

Although it is essential to validate assumptions early in the seed stage fundraising process, it is even more important to validate assumptions about your product and ensure that it is scalable. Before you approach any investors or extend any terms and conditions to them, it is important to understand from their perspective what you are building.

This is particularly important for companies building something new. For example, let’s say you are developing a chatbot to help businesses with marketing management. But while the chatbot is useful enough to build a business around, it is not scalable.

While a business with a chatbot is scalable, a chatbot that has been optimized to run marketing campaigns is not scalable. It is important to understand whether your product is scalable or not as this will affect the terms and conditions you offer your investors.

It is also important to understand whether your product is scalable or not as this will affect the terms and conditions you offer your investors. For example, if you are raising a seed round, your investors will expect you to be operating at a low level and you may have to limit your growth.

3. Set up a clear fundraising process and roadmap

Every fundraising cycle brings its own unique challenges, especially in today’s competitive and crowded funding landscape. As such, it is important to keep your process and roadmap for fundraising as clear as possible, especially for companies launching an equity round.

Although raising at the seed stage can take longer than other rounds, the benefits are huge, which is why you want to make sure you carefully plan and execute your fundraising efforts. Plan your fundraising approach well in advance and break down your fundraising roadmap in a manner that allows you to track the progress of your fundraising efforts.

A key advantage of fundraising is that it enables you to validate assumptions and test your business model early on, which can save you a lot of time and resources in the long run.

Make sure you carefully plan your fundraising approach and roadmap and track the progress of your fundraising efforts.

It is important to keep an eye on the following while planning your approach and roadmap: 1) Your fundraising timeline; 2) Your fundraising strategy; 3) Your fundraising targets; 4) Your fundraising milestones; 5) Your fundraising actual progress

4. Understand the value of your users

The next important step in deciding how to raise capital for your company is to understand the value of your users.

You can do this by building a Value Proposition Canvas as you will learn about your users along the way, which will help you understand their pain points and core use cases, as well as determine the value your users bring to your business at the seed stage.

When you identify customers’ Jobs-to-be-done through this canvas, you can detect the pains they experience and the gains they receive from your product.

What makes a product successful is not just the features that it offers, but how those features fit within the overall context of the product. Therefore, it is important to understand the value your users bring to your business and the pain points they experience.

Bonus: Diversify your funding strategies and processes

Investors love to see viability, traction and results from your business. One way to do this is to diversify your funding sources and approaches. When it comes to funding strategies, you need to make sure that you have a variety of funding sources that you can pursue at different stages of your company’s growth, including at the seed stage.

This is important because building investors’ network before and during the seed stage takes time and efforts and cannot be done over-night. If you have an extended investors’ network, you can see which one would provide you with a more suitable deal offer and with which one you have a click.

There are three main types of funding you need to diversify among: debt, equity, and convertible debt. While debt makes sense at the start of a company’s lifecycle, at the seed stage, it is recommended that you diversify among equity sources.

With equity funding sources, make sure to diversify among different types of investors. This will help you to generate a wider array of advice and perspectives on your investment, while also ensuring that you are aware of other investments and investors that may be pursuing your same investment opportunity.

Final words: Create a growth fund and keep it dry

While raising at the seed stage is a great opportunity for startups to build their product and test their business model, many entrepreneurs consider raising a seed round to be the end of the fundraising process.

Unfortunately, this is not the case. While raising a seed round can take longer than other rounds, the benefits of doing so are huge, which is why you want to make sure you carefully plan and execute your efforts.

However, the reality is that raising a seed round does not end your fundraising efforts — it is just the beginning. While raising a seed round may be your first round of funding, it certainly is not your last.

You will have to continue to build your business and expand your customer base. This means that you need to raise more funds, either through equity or debt, at different stages of your company’s lifecycle.