Investor fit, and the five Ts of startup seed fundraising
The first or initial round of capital raised by a company is typically called “seed” capital. When it comes to growing a business, seed investors can provide you with capital, network, expertise, and support. Seed capital will help you not just take the business off the ground, but also help your company scale and take it to new heights. It provides a competitive advantage in all ways that matter – hiring key staff, resources, business development, marketing, and sales.
The process of fundraising is long, complex, and exhaustive. Nevertheless, it is a path almost all companies and founders must walk.
Think you want to raise venture capital? Here are five ‘T’s that most seed investors/VCs look for before considering making an investment:
Every founder needs to know “what is the problem they’re trying to solve,” and “if it’s a problem waiting for a solution”. This problem is felt by a specific group of consumers or businesses. One key aspect that needs to be described and understood is the gap between the current state and the target state in clear and measurable terms, revenue potential, and if the market is big for it.
The success of a startup hinges on the team’s mentality for innovating on existing ideas to solve critical pain points, inherent qualities like hustle, perseverance, leadership style, etc., and their execution capability.
The problem/pain point stated can only be solved with technology. The choice of technology has to be a pragmatic one rather than based on preferences and trends. In addition, technology should help businesses scale and increase efficiency.
Traction denotes validation of the product or service in the market. Once your customer has no vested interest in your company's success and decides to spend money, time, and resources, it is indicative that you are getting traction. Remember, short sales-cycle and scaling the product should be easy to achieve immediate traction.
The founders need to do a reality check to see if the market or customer is ready for the product or service. We have heard many success stories like Airbnb and Uber – a big part of their success is attributed to the timing of their launch. Strike too early or too late, and you risk striking out.
Factors that are important for an entrepreneur to consider before reaching out to investors are ‘Investor fit’. This matters particularly while raising a seed round, as they play a role in future rounds of raising capital. To ensure there is value and personality fit, it is a good practice to speak to other entrepreneurs in their portfolio and get their feedback. Be sure you know what domains or sectors your investor is focused on. Knowing this is important, as it defines an investment and partnership fit.
In sum, if you are looking for a VC or angel investor capital, be sure that your product and business is investor-ready. Once you have everything in place, you can tailor your investment pitch by adding the other things that angel investors are looking for, as outlined above.
Shalini Prakash is a Venture Partner at 500Startups where she heads India investments and portfolio.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)