Start at the beginning - know where you are

It took me a few years to finally get this straight. Depending on who I spoke to, I would get a wide variety of definitions of what "seed" versus "pre-seed" versus " Series A", etc.  So, lets get right into it...

In general, the financial raise follows these steps. I'm sure there will be some varying opinions, and I'm not suggesting this is the 11th Commandment written in stone, but I will bet  you will find the general consensus as I have observed is as follows:

Founders Round  - this is the grass roots round. You have nothing but an idea and your own money that you have invested or qualified for some grants, coupons, or other non-dilutive funds. (otherwise known as Boot strapping.). Sometimes friends and family participate as well. The product is either a concept written down on paper, or a very rough prototype you've built in your garage, etc..

Pre-Seed Round - this is where you are focussing on developing that prototype into a minimum viable product (MVP) and proving that it actually does what it is supposed to. The company does not have cash flow, or sales as the product is not fully developed.

Seed Round - this is where you now have an MVP established (it's not pretty, but it does the job and craves a new version soon). The intent is validate market and product fit and demonstrate early traction with sales. If your product has not been developed and you do not have a client that has ever used it in a real life situation, you are not at Seed round. You are at pre-seed round. Turn around and finish that step!

Series A Round -  funds to implement a scalable full Go To Market (GTM) strategy and expanding your customer base.

Series B Round - expand the addressable market and optimize operations, translating to higher revenue and margin

Series X Rounds - these rounds are usually to fortify and already existing regionally established company that is either looking to penetrate the next regional market (international markets; different countries, different continents) or perhaps to new market segments and parallel products that have not yet been pursued.

Build and match your plan 

Understanding this progression of rounds is super important. Your budget, business plan and forecast should completely embrace that and not veer outside the lines. For example, if you are focussing to develop on a minimum viable product to demonstrate that it works, you are definitely in the pre-seed round phase and should have a small and committed set of early adopters to assist in that development of the product. You are taking little to no salary (and likely won't until the company is cash flowing.).You are looking to raise money to fund you until you are ready for a seed round. You do not attempt to the different product. You do not attempt diversified international sales.

So often, I meet clients that are at the pre-seed round (need to develop and finish their MVP), but want to hire a sales person to 'get sales going'. They also get carried away with product variety, sales, expansion, and of course, valuation using a cash flow forecast on sales that have not occurred yet.  What's even worse, some of these clients take this net present value of that cash flow to put value of the company and expect that is the company evaluation when they make their raise. Don't. Just don't.  Stick to your knitting and prove your product first. I crack into this topic further in my blog on MVP development to expand on the importance of this step.

How Much Do I Raise? 

 
The single biggest questions you'll ask yourself (I know I used to) is how much do we raise? The simple answer is "as much money as you need to reasonably achieve the next financing milestone". This is monumentally important for pre-seed and seed rounds. Investors invest in people, not technology or products. If they do not trust the founders's ability to execute, and that they know what they're doing, it doesn't matter how great the product or technology is.  They have seen too many companies with genius ideas turn to a dumpster fire due to bad leadership and bad decisions, so let's not do that.

For example, If you raise money in a pre-seed round, be very clear and disciplined that your money and resources are dedicated, purely to developing the MVP and it gets honed and perfected with early adopters until it is demonstrated that there is a solution in a market for that product. Now, I say honed and perfected but the reality is there will always be room for improvement. This will be a judgement  to find that "80% solution. Now, I say honed and perfected but the reality is there will always be room for improvement. This will be a judgement call to find that "80% solution" that is good enough for repeat sales and no recalls, I don't spend endless months perfecting a feature that will not make a material difference to the buying decision or the bottom line.

So how much money do you raise for Pre-seed?

Let's break it down. Build a financial model that forecast your monthly activities. Your financial model should include income (revenue, investments, non dilutive funding, grants etc.), expenses (fixed and variable).and any other anticipated obligations like loan repayment, earn out payments, dividend obligations (hopefully at this stage you won't have any).

Next, forecast on a monthly basis all of these variables. Be particular and realistic with both your expenses (look at the last 12 month average to get a good sense) and revenue. Do not just take a sales number and multiply it by 10% and copy forward.  Investors recognize this immediately and it is not realistic or believable.  Have a specific plan on how you are going to achieve your initial traction in the next 12 to 18 months. Checkout our tools section to download a financial model to get you started.

Now, when I say 12 to 18 months, what I am really saying is the amount of time it will take for you to achieve a quality MVP and demonstrate some market confidence and traction (first sales). This may be accomplished in nine months while others may take two years. Build it out so it is realistic but attractive. You will lose your credibility for being too optimistic if you get this wrong. However, if your plan is to have for sales in three or four years, that won't make investment sense and most investors will not have that patience because they understand the time value of money. There are always exceptions to this but lets just say time is not your friend.

Run the forecast out until you have accomplished both of those tasks fully; an MVP complete and attractive enough for first adopters to say "yes I will pay for this", and demonstrate it with some sales, and a clear demonstration that others are willing to pay (purchase orders are ok, but deposits on pre-orders are ideal). Then you are ready for seed financing. That is what you budget for.

When you finish this model, the forecast will show that you will be in a cash deficit, so now you simply go back to your model at the beginning of time and enter the capital investment of what you need (say it's $500,000). Your model (presumably built in the spreadsheet) will now demonstrate how the money is allocated and that you will have a plan to finance to your next financing round. Be sure to have the summary of how that money is allocated (spent) when you prep for your presentations (ie. 17% G&A, 27% Engineering, etc.)

But what if I can't raise in the next round? 

If the business plan is sound, and you did what you said you're going to do in the pre-seed round (close on the financing, finish the MVP, demonstrate traction, and stay within budget.) that means you have concurrently accomplished several other prerequisite and co-requisite tasks in order for that to happen. You clearly worked your tail off. You clearly used resources and engaged with a client. You worked with discipline within a budget and a timeframe and obviously you struck a cord with the market that you have demonstrated a need for your product that is what you present in a seed financing presentation. If you do this, raising seed financing will not be an issue.

Now in many cases,  that initial traction can be so powerful that seed financing may not even be necessary. Between pre-order deposits and negotiations you can make with supply chain to pay interest for net 60 or even net 90, may allow you to rotate sales without the need for additional capital. Of course this depends on your margins, the relationships you have with your supply chain, and your market, but many companies have accomplished this.

For more information on raising money and pitching check out my other blogs.

Thanks for reading & do well!