Failory - A Guide to Raising Seed Funding

Hey — It's Nico.

This week I bring you more fundraising-related content. This time a complete guide on how to raise a Seed Funding round for your startup.

🙌 Welcome to the 458 founders who joined this week.

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What is Seed Funding? It's the vehicle for your startup to continue the progress made in your pre-seed stage by iterating on your idea or minimally viable product.

We've previously written about Pre-Seed Funding. Seed funding is what comes next in a startup's fundraising journey.

What is Seed Funding used for? Basically for two things:

1. Developing a sales-ready version of your product or service by hiring talented engineers and designers.
2. Acquiring customers by spending on marketing and getting validation on your key product/service assumptions (product-market-fit).

When to raise Seed Capital? You should start raising seed capital 4-6 months before you’ve finished deploying the funds from your pre-seed round.

This timing should give you and your team enough time to pitch to your existing and new investors and show them that your startup's traction and trajectory are worthy of the next round of capital.

How does Seed Funding work? Venture deals can be more of an art than a science. That's why it's crucial for you as a funder to fully understand the law mechanisms of seed funding.

​In the article, we analyze three types of financing: Equity Financing, the typical one; Debt Financing, a common alternative; and SAFEs, a newest kind.

How much Seed Funding should you raise? The general rule of thumb for seed is to raise enough money to find product-market-fit as this makes it easy to then raise an A round or survive without new funding if the funding environment dries up.

With that being said, certain kinds of startups need various follow-on rounds of funding before reaching PMF. Your goal in these cases should be to raise as much money as needed to hit whichever milestones investors agree will suffice for you to unlock your next check, which will usually be 12 to 18 months after your seed round.

We studied 8,769 seed rounds and discovered that the average amount raised in a seed round by US startups is $3,034,212, while it’s $2,978,363 for startups in the rest of the world.

How much dilution is given in Seed Rounds? Dilution is when a shareholder’s ownership becomes smaller proportionally because new shares are offered to new investors. The sweet spot is anywhere between 10-30% dilution, being 20% on average.

What are the common sources of Seed Funding? In the article, we analyze these 6:

1. Venture Capitalists
2. Angel Investors
3. Angel Funds
4. Friends and Family
5. Equity Crowdfunding
6. Accelerators

How much time does it take to raise a Seed Round? On average, it takes founders 39 investor meetings to close a seed round. How long it takes to pitch that many investors varies:

• 37% founders close a Seed round in 1-6 weeks
• 32% take between 7-18 weeks.
• The rest take 19 weeks or more.

How long should Seed Funding last? It depends on many factors that vary across industries. The general piece of advice is that it should last you as long as you and your team need to either:

1. Find product-market-fit where you can be profitable and not have to raise money again.
2. Hit the product and go-to-market milestones that future Series A investors believe that shows your startup can continue to grow and therefore give you more money.

These were the key points of the article, but if you're building a startup and think you might raise funds in the future, I strongly recommend you to check the guide.

​Here's our guide to raising a Seed Round.​

Just some weeks ago, we published a guide on Pre-Seed Funding. You'll probably want to read that one first, particularly if your startup hasn't raised any funds yet.

As every week, here are three recommended resources:

• ​How to Validate Your Startup Idea: Todd Jackson spent months researching, interviewing, and synthesizing lessons from some of the top startups to understand how they came up with their idea, validated it, and gained traction.
• ​How to Beat Your Competition at Search: It seems impossible to get organic traffic and clients with a new domain and strong competition. The "underdog SEO strategy" provides a framework to win in these situations.
• ​The 4 Only Scalable Customer-Acquisition Channels: All famous startups and companies scale through one of these channels: SEO, online ads, sales, and virality. This article briefly analyzes each of them.

Hope you've enjoyed this week's newsletter ;)

Cheers,

Nico