Having recently graduated from Y Combinator, I'm going to walk through exactly what we did to raise our seed funding. Hopefully this will be helpful to other founders navigating the world of early-company fundraising.
If you have any questions, please reach out to email@example.com.
Our number one goal was to stop raising money as soon as possible.
You hear this advice constantly, and it is incredibly helpful. Raising money is a means to an end. The best way to raise money is to build a fantastic company; raising money is tangential to building a fantastic company; get back to building ASAP.
Our second goal was to only accept investors who provided value beyond money. There are plenty of companies with tons of money that end up failing. As a young company, money helps, but there are enough people with money that you can and should start prioritizing on other things.
We laid our three goals for ourselves on the money side:
a) Raise $0. Our current money in the bank could get us to profitability.
b) Raise $750,0000. This was enough to hire past our bottlenecks in engineering and growth. We had more customer interest and requested features than we could handle.
b+) Raise 1.5-3x plan B. Provide cushion for additional hires beyond plan B, with a timeframe of late 2016-early 2017.
a) People who are complementary to us.
We are a very introverted company, in that we prefer to keep building and talking with our customers than chatting with investors or tech press. That can be good, but marketing and brand are important and opportunities for us to bring in experienced experts.
Additionally, our founding team is two white men, which means our networks skew towards that demographic as well. We wanted people who could help us hire; not only incredible people, but a diverse team as well.
Some of these we can't talk about publicly yet, so I'll give related examples.
Imagine you have a startup building satellites. Elon Musk would be great to have on board, since SpaceX already works with people who need satellites. He can make those connections when the time comes. Additionally, having Elon Musk, a prominent space entrepreneur, as an investor signals to other people that you are probably doing something right.
Order of Operations
We started talking to investors in order of likelihood to close quickly. Even if they are smaller checks, you're building momentum and showing every future potential-investor that others have already taken the plunge.
Additionally, we prioritized based on those who were likely to believe in us and in reverse order of "investorness." We had a sense of what we were worth, so we wanted to start out at the lowest valuation with those who weren't going to be ruthless negotiators. That set the floor, so when other investors came in they knew we wouldn't go below that.
That said, don't ask your parents for a $10k check at a $100m cap. They may sign it, but that doesn't prove anything.
Friends and family
Who: These are the people who believed in you when you quit your jobs at a fast-growing company to start your own business in a market you knew nothing about.
The Pitch: You believe in us and we want to have you onboard. We can't promise anything, and in fact the odds are that we'll lose all of your money, but your support is worth more than any number of zeros.
Check size: Small (~$10k), but they deserve to come in at the lowest valuation because they stuck with you and can move quickly.
Never forget those who got you where you are today.
Our First: Prior to raising our Seed round, my dad and step-mom wrote our first outside check. When we started raising, Nick's parents were the first in the round. We're pretty proud of that.
Angels are disproportionately motivated in your mission (the effect you want to have on the world), your vision (what the world looks like when you're successful), and the founding team.
Who: Founders with successful exits or later-stage VC-backed companies. Prefer those with similar backgrounds. For us, that meant either YC founders—to whom we had the chance to pitch to before real Demo Day—or those who have attacked difficult markets with an eye towards social impact.
The Pitch: They have been through the trials and tribulations, not only of fundraising, but of building a company. Those with successful exits are likely to want to pay it forward to people they believe in. Those interested in social impact naturally gravitate towards wanting to build a better government.
Be very open and honest, then let them decide if they want you to be successful.
Check Size: Small (~$25k). In my personal opinion, a better indicator that you will be successful than if a giant VC invests in you, but that is my opinion and comes from instinct rather than data.
Our First: Jude Gomila, founder and CEO of HeyZap (YC W09). Jude heard our pitch at Alumni Demo Day, spoke with me at length, demoed the product, read our help documentation, and, despite no history in the government space, decided to invest.
Micro-VC & other Angels
Who: As opposed to other founders, these are people who invest regularly and whose primary job you would consider to be "investor."
The Pitch: Our history as a founding team and the growth of the team are early, but trending in the right direction. We have a strong background, understand our market, and have laid the foundations for a great next 12-18 months.
Check Size: Small-Medium (~$50k). Far more valuable is their advice (they have worked with many companies at a similar stage) and connections (they commonly co-invest with the same people and can talk you up with other interested angels.)
Our First: Semil Shah, as part of Haystack Ventures. Semil invested before Alumni Demo Day and was the first non-"Friends and Family" investor in Seneca Systems. He has been, without a doubt, an incredible help to the company.
Who: These are venture capital funds that focus specifically on seed-stage companies. We prioritized funds who don't do A rounds—not counting follow-on investments to their initial seed investment—because this would be the only opportunity to get them involved.
The Pitch: This is a large market and we are the ones to crack it. Additionally, we (the founding team) would work well with you (the partners) and you (the partners) are good at things that we (the founders) are not.
That last part is important, since seed investors who write larger checks will often want to be more involved, so you better make sure than can be usefully involved!
Check Size: Medium-Large (e.g. $500k-$1m).
Our First: Initialized Capital. We met with the team on Investor Day for 20 minutes and fell in love (mutually, we think!) They understood what we were doing and, more importantly, why. Their partners are former founders, as well as YC alumni, so we were able to quickly do reference checks.
Who: These are larger VCs, most of whom reside on Sand Hill Road in Menlo Park. We differentiated between Seed Funds and those who also lead A rounds, because the latter can take longer to decide and have some risks associated with taking their money.
The Pitch: Not only do we have great traction today, but we also have a clear path to our next milestones. Those milestones are generally what it would take to raise a Series A, so ballpark $1-3 million in annual recurring revenue.
Check Size: Small-Large (e.g. $100k-$2.5m.)
Be wary of a $100k check from a big name, which usually comes out of a "discovery fund". They are essentially calling "dibs" on leading your A round by getting involved early. That's great, but there is a downside. If they don't end up leading the A, that signals to every other investor that something is wrong.
For larger checks, be ready to trigger a Series Seed (i.e. priced round) and to give up 20-25% of the company.
Our First: N/A. By the time we got to these conversations, our round was closed. Still important to take the meetings, as these are the people we'll engage with if we decide to raise an A round. Relationships take time and A rounds almost always involve a board seat, so don't leave these until the last minute.
Terms and Conditions
We had a few rules to guide us down our journey, mostly around who to reject.
We decided from the get-go that we were too young to need any crazy documents; nothing that couldn't be outlined in a short side-letter. Our entire round, including checks in the seven figures, was handled with SAFEs, so don't let any investor tell you it isn't normal or can't be done.
In two instances, when the check size was large enough, we signed side letters that gave certain investors additional rights. These were information rights (essentially access to regular financial statements) and pro-rata rights (allowing them to maintain their percentage of ownership at the Series A, as opposed to the standard SAFE pro-rata which starts at Series B.)
We did not allow any changes or additions to our board.
You never have to take anyone's money.
Bringing on an investor is like getting married, but not in today's sense. More like in a Medieval England sense, where the only way to get a divorce is founding a new religion. Unfortunately, you're not the king of anything so make sure you love the person before you get hitched!
Depending on who's counting, our seed round took between 2 weeks and 21 months to raise. Seneca Systems was founded in late-November of 2014 and we closed our seed round in late-August of 2016.
Until we entered YC in June of 2016, every investor we spoke with had significant qualms about government. As we exited YC, nearly every investor (some of whom had previously been nervous) was suddenly incredibly excited by government.