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Three Pieces Of Advice For Entrepreneurs Navigating Seed Funding

Kevin Coker is the Co-founder and CEO of Proxima Clinical Research and works with the new class of rising drug, device and diagnostic stars.

You’ve got a new business idea, product or technology. You’ve designed your plan, and you know who you want on your team. Now, you need to convince someone to give you money so you can execute it.

Seed money funds the initial stages of a business. It typically ranges from a few thousand dollars to a few million. Seed money is often used for market research, product development, hiring the initial team, obtaining equipment, initial production and distribution, and securing initial facilities. It is vastly different from venture capital funding.

VC funding is much larger than seed money. It’s typically used to fund later equity rounds in the hopes of fueling an acquisition or taking a company public. Although seed money is less than VC money, it can be the most expensive money you’ll ever take, which is why it’s critical to manage seed funding well.

Seed funding often comes through angel investors who offer the money through a legal instrument such as a convertible note or simple agreements for future equity (known as SAFE notes). At this stage, the investor is taking on much greater risk. In my experience acquiring funding for my own companies as well as funding opportunities as an angel investor, I’ve found that most angel investors will invest small amounts of money across multiple deals because they anticipate the majority won’t succeed.

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In these initial fundraising rounds, it’s easy for founders to get caught up in thinking, “I just need funding to start. I’ll take it from anyone willing to invest, and I’ll take as much as they’re willing to give so that I don’t have to ask for more later.”

Here are three reasons to think differently.

1. Strategic investors are important at all stages.

The excitement of getting the initial funds to launch your dream can cloud judgment that will later bite you if you’re not strategic about the type of investor you need. You want investors who complement the strengths of your team and supplement your weaknesses.

For example, if your team is strong in the areas of design, ideas and production but lacks skills in marketing, positioning, pricing and placement, look for investors who offer expertise in these areas in addition to funding. If you feel you have a strong, well-rounded team and all you’re missing is the funding, you might seek out a loan or silent investors rather than equity partners.

The only thing that makes an investor a good investor for you versus a bad one is in the way they either fulfill your needs and gaps or get in the way of decision-making. Set strategy ahead of time with your investor. This can ensure they don’t try to derail your efforts with their demands for you to follow their rules versus your own ideas on how to bring your product to market and operate efficiently and effectively. Mostly, you want an investor who shares your exact vision. From my experience, once they are on your capitalization table, the contract is more binding than marriage.

2. Starting with as few investors as possible can be beneficial.

Taking on too many investors, especially investors who are not part of your strategic plan, can create a new level of stress and distract you from your purpose. When you accept $5,000 from one person, $25,000 from someone else and another $40,000 from a third investor to help raise the initial $1 million needed to launch, your cap table can get quite complex. Managing this could also derail your efforts to raise funds in future rounds due to the complexities.

3. Don’t give away more than necessary.

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As I mentioned previously, too many investors can complicate decision-making and strategy and make your offer less attractive when negotiating future funding deals. Too many investors can also lead to you giving away more equity than you need to.

It is easy to get lost accepting seed funding from a variety of sources through family, friends and others to raise your initial capital only to discover you’ve accidentally given away a third or more of your company and you’re not even ready for Series A funding. If you’re unsure of how much of your business to give in exchange for funding, talk to more people in your network. When you get an answer, talk to someone else. Keep exploring until you get better numbers, better answers and a better understanding. Don’t just settle for the answer you get; negotiate.

Be strategic in who you take on as an investor. The more equity you give away in early funding rounds, the less enamored future investors will be when it comes to future rounds.

The bottom line is this: Aim to acquire the funding you need, and avoid taking on too many investors. Make sure those investors are aligned with your vision and complement your team’s skills to get to market and grow to Series A funding status.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?


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