Seed-stage financing is the initial capital investment in a startup company by an outside investor (i.e., someone who is not family & friends). The goal of any seed round should be to plant the seeds for future growth. What this means in practical terms is that you will be using this seed capital to hire full-time staff, buy equipment, and commercialize any working prototypes. But how much should you raise in your seed round?
The obvious answer, of course, is that you should raise as much capital as you can. More realistically, though, you should be looking to raise enough money to last for the next 12 to 18 months. This is what venture capitalists refer to as your “runway” – it is the amount of time you have for your company to take off. The longer your runway, the higher is your margin for error. Thus, it’s best to shoot for 18 months of funding, while realizing full well that you might only raise enough for 12 months.
As a simple benchmark, most Silicon Valley startups will calculate how many full-time employees will be on their team (usually between 3 and 5), and then multiply that figure by $15,000 for every month of a runway. So, for example, if your startup team of 5 engineers is raising money for 12 months, that means you would multiply the following: 5 x 12 x $15,000. That leads to a ballpark figure between $1 million and $1.5 million.
And, indeed, if you check out most seed rounds these days, that is a pretty accurate ballpark figure. These days, the minimum amount to raise in a seed round is $100,000, and the maximum amount is $2 million, with the most common amount being around $500,000. Anything less than $100,000, and you can probably stick o angel investors. Anything more than $2 million, and you need to be talking about a Series A round involving a syndicate of different VC firms.
Another way to think about the correct amount to raise in a seed round involves looking at “comps” (investor shorthand for “comparables”). In other words, if other similar companies are raising $500,000 in their seed rounds, it’s a safe bet that you should be looking to raise about the same amount. If everybody else is raising a half-million, and you are trying to raise two, three or even four times that amount, you better have a good reason.
Keep in mind – the amount of money that you raise in your seed round is going to have an impact on your future valuation. That means you should have an excellent idea of how other companies in your industry or niche are being valued, and what sorts of assumptions are being made about growth in the industry.
If you raise a seed round of capital, you now have 12 to 18 months to make things happen. Less than half of companies that raise seed financing ever go on to raise a Series A round, so there is a very distinct likelihood that this is both the first and last round of financing you will ever receive. So you have a genuine reason to make maximum use of that money and put your company one step closer to future profitability. If nothing else, it will make future fundraising discussions with other VC firms much easier to negotiate.