Finally, it feels like you are ready for capital. You’ve assembled your business plan. Built your founding team. Your research and pro-formas show that there is real potential here. You’ve designed and maybe even developed your Minimum Viable Product. You may have a few handshake contracts – maybe even some sales. But the work to be done costs far more than the number in your bank account. Or maybe it doesn’t, you’d just prefer to put somebody else’s capital at stake and keep some dry powder of your own for the future. No matter what the specific situation, you want money and you need to find it. Here’s how.
Types of Seed Capital
Seed capital comes in one of three forms: grants, debt, and equity. Many entrepreneurs use a mix of all three to make it through the early days. Some use none at all. We’ll cover the pros and cons of each, and how to find them.
Grants: Grants, or free cash, are most often found in the “startup game” world. You’ll find colleges and business organizations promoting pitch contests with cash prizes, business plan competitions, and other startup specific opportunities to win money. I have never personally seen a prize larger than $10,000, but hey, that’s real money for a seed stage startup. I encourage all founders to pursue these opportunities because a) it’s free money, b) it’s a free opportunity to practice the pitch or refine the organizational documents, and c) it’s free marketing – you get your name and idea out to a group of folks who would otherwise not know about it.
Debt: This can be a tough one for early stage founders, because traditional banks generally lend on business records, and you don’t have a business history. Without one, you aren’t getting a loan. Your remaining options are a SBA backed loan or a private loan. SBA loans are wonderful, you just have to jump through a few hoops to get them. Private capital requires less hoops, but more networking. Private capital debt also most often come with the highest degree of flexibility but also the highest rates. Right now, for example, traditional debt is running in the 6-8% range, whereas I’m seeing private debt at 10-11%. The benefit of debt over equity is of course that you retain full control over your company.
Equity: Equity is the traditional funding method for venture deals, even at the seed stage. There are many types of equity funding instruments, and we’ll cover a few here, but the most important aspect is the understanding that equity funding is not repaid – an investor purchases a portion of the company for a negotiated price, and they retain that equity until they are able to sell it elsewhere, or until the company fails. There is no ongoing cost to you as an investor. Most early stage equity deals are one of three types: straight equity, a Convertible Note (CN), or a Simple Agreement for Future Equity (SAFE). I’ll write a post on each of these so that we have the opportunity to explore each in the detail they deserve, but will summarize each briefly below for now:
- Straight Equity:
- Convertible Note (CN):
- Simple Agreement for Future Equity (SAFE):
How and Where to Look for Capital
It seems like this is often a sticking point for new entrepreneurs, especially those who have never raised capital before. Although building a business plan should have theoretically given you some exposure as you validated your concept, did market research, pursued free resources, etc., presenting yourself to investors and asking for their money can feel like a pretty big step. And it is. But it’s also nothing to be afraid of. Mindset matters here, and we’ll discuss why it does and how to approach raising capital in other posts.
We’ll take a moment to explore each of the three categories referenced above: Grants, Debt, and Equity.
Grants: Free money is always good, provided that any strings attached are mission aligned. Much of the free money floating around in the world comes from educational institutions, established entrepreneurial resource groups, and government affiliated economic support organizations. Those are the places I’d recommend you begin your search. Google search phrases like “pitch competitions near me” and sort through the noise to find known organizations talking about established and vetted programs. You’ll find competitions that cater specifically to women entrepreneurs, or to only the tech sector, etc. Find opportunities that align with your brand, your goals, and you. If you can, find the name of a program manager or employee, call or email them, and ask to buy them a coffee and talk about the program. It is more likely that you are accepted to participate if somebody on the inside can put a face to your application.
Debt: In my experience, debt is the trickiest way to secure capital at an early stage. There are some small business-centric banks and credit unions out there who occasionally do it, but without significant revenue, you’ll at the very least need to put your personal assets on the line to collateralize any business debt obligation you take on. SBA loans can be effective, but are labor intensive and restrictive to secure. Private lending is often the most reasonable approach to seed stage debt, and private lenders can be hard to find if you aren’t already in their network. Private lenders are not banks, they are individuals or businesses who may choose to loan capital on their own. These loans are often not restrictive and while there should always be written documentation of terms and agreements, are considered more of a “handshake deal.” The best way to source seed stage private capital, in my experience, is by networking. Attend local pitch events and small business events whether or not you are presenting or participating yourself. Meet people, introduce yourself and your business. Work it into the conversation (or a following conversation) that one of your priorities for your business right now is sourcing some private capital. Know how much and the general terms you are looking for, so that when somebody asks you what you want, you have a clear answer.
Equity: Perhaps the most common way to fund a non-bootstrapped startup is some type of seed stage equity. These deals most often come from stablished investor groups. Some run as traditional venture capital firms that happen to work at the seed stage, some are groups of accredited investors who work together on investments and are often referred to as “investor syndicates,” and others are more loosely collected groups of associates who choose to invest together on occasion. At least for the first two categories, they’re looking for you as hard as you’re looking for them, so they are generally pretty easy to find. Hop on trust ol’ Google and search topics like “seed stage investor groups near me.” Yep, it really is that simple. Search the results and find firms or groups that operate in your geographic area and are aligned with your product, service, or sector. Once you’ve identified some, you’ll want to find a contact to introduce yourself to. With that out of the way, you’ll submit an application to pitch. These days, that is often as easy as completing a form on the company’s website.
Good luck out there in the wild world of seed stage capital sourcing.
Seed Stage Sage 