A primer for entrepreneurs looking to raise seed capital.
By Chris Dixon, contributor
Last night I taught a class via Skillshare (disclosure: Founder Collective is an investor) about how to raise a seed round. After a long day I wasn’t particularly looking forward to it, but it turned out to be a lot of fun and I stayed well past the scheduled end time. I think it worked well because the audience was full of people actually starting companies, and they came well prepared (they were all avid readers of tech blogs and had seemed to have done a lot of research).
I sketched some notes for the class which I’m posting below. I’ve written ad nausea about venture financing so hadn’t planned to blog more on the topic. But since I wrote up these notes already, here they are:
1. Best thing is to either never need to raise money or to raise money after you have a product, users, or customers. Also helps a lot if you’ve started a successful business before or came from a senior position at a successful company.
2. Assuming that’s not the case, it is very difficult to raise money, even when people (e.g. press) are saying it’s easy and “everyone is getting funded.”
3. Fundraising is a momentum-based process. Hardest part is getting “anchor” investors. These are people or institutions who commit significant capital (>$100K) and are respected in the tech community or in the specific industry you are going after (e.g., successful fashion people investing in a fashion-related startup).
4. Investors like to wait (“flip another card over”) while you want to hurry. Lots of investors like to wait until other investors they respect commit. Hence a sort of Catch-22. As Paul Graham says:
5. Network like crazy:
6. Get smart on the industry:
6. How much to raise? Enough to hit an accretive milestone plus some buffer. (more)
7. What terms should you look for? Here are ideal terms. You need to understand all these terms and also the difference between convertible notes and equity. More generally, it’s a good idea to spend a few days getting smart about startup-related law – this is a good book to start with.
8. Types of capital: Strategic angels (industry experts), non-strategic angels (not industry experts, not tech investors), tech angels, seed funds, VCs.
10. Cofounders: They are good if for no other reason than moral support. Find ones that complement you. Decide on responsibilities, equity split etc early and document it (legal documents don’t hurt friendships – they preserve them).
11. Incubators like YC and Techstars can be great. 99% of the people I know who participated in them say it was worth it.
12. To investors, the sexiest word in the English language is “oversubscribed.” Sometimes it makes tactical sense to start out raising a smaller round than you actually want end up with.
Chris Dixon is co-founder of Hunch, and is an active angel investor. Visit his blog.