September 3, 2019

How to Raise a Seed Round

The reality is, not every company is ready for a Series A -- they might still be struggling with things like customer acquisition costs, unit economics, business model, etc. But those limitations aren’t unusual. And they might instead make that company a great candidate for a seed round.


Justin Kan (@justinkan) knows a few things about raising capital.He founded Twitch — a video game streaming platform (acquired by Amazon for $970mm) — he was a Partner at Y Combinator where he impacted over 900 companies and funded more than 130, and he’s currently the CEO of Atrium, where he’s building technology to revolutionize the $450 billion legal industry.Along the way, he’s raised a bunch of venture capital from Silicon Valley VCs, and he’s constantly sharing his learnings for the benefit of Founders.The reality is, not every company is ready for a Series A — they might still be struggling with things like customer acquisition costs, unit economics, business model, etc. But those limitations aren’t unusual. And they might instead make that company a great candidate for a seed round.Kan recently shared his roadmap for seed funding success on the Atrium blog. We went through and distilled a 14-minute read into a 4-minute one on one on How to Raise a Seed Round. Here are the highlights…

Are you ready for a seed round or a Series A?

Justin: When you may be ready for a Series A:

  • You have compelling metrics (growth, unit economics), have figured out customer acquisition, and are growing rapidly.
  • You are building into a large space that can support a company worth hundreds of millions or more. [We’ve written about this here.]
  • You have a strong team.

Still figuring it out? You’re probably at the seed stage:

  • If these are not true, you are probably a seed-stage company and should target raising a seed round. “[Companies not ready for a Series A] haven’t figured out things like customer acquisition costs, unit economics, business model, and other checkboxes that make a Series A viable.”
  • “For startups to raise a seed funding round, you don’t have to have everything figured out yet. Usually you should have assembled a founding team and have built something. Not having built something is a warning sign to investors, because the cost of creating software is now so low you can get started while you have a day job.”

Bigfoot: Some Series A expectations have moved to the seed stage.

  • We see that unit economics metrics are directly applicable at the seed stage with many investors (ourselves included) expecting some tangible, reportable proof of traction (beyond product development) earlier than has traditionally been the case.
  • Here’s an article we’ve written on some of the metrics we believe matter at the seed stage.

How investing environments have evolved

Justin: The investment environment has changed over the last 10 years.The investment environment in 2007: “When we raised our first seed round for in 2007, we raised 250k at a 3mm pre-money valuation (and this was considered very high!). Raising money from seed investors was a very linear, manual process: we would meet an investor (usually referred by a fellow entrepreneur), ask them if they would invest, and then go to the next investor. When we had enough investor commitments, we did a priced round and collected the entire $250k at the same time. Raising our seed round took months.”The investment environment in 2018 (“high resolution fundraising”): “Many investors are now using the Simple Agreement for Future Equity (SAFE), a lightweight convertible security that allows investors to sign a simple contract and immediately wire money. Most importantly, it is an open standard that has been accepted by the market, and it allows founders to collect money in smaller increments (instead of raising their whole round at once).Because of this, startup investing has changed to be high resolution fundraising: early investors will often be rewarded with lower valuation caps than later investors.For example [for Y Combinator companies], a company might raise and collect its first $500k pre-Demo day at a $6 million cap, and then raise another $1mm at an $8 million cap after Demo Day, when they have momentum in their round (it is lower risk for an investor to invest once the company has already raised some of its money, because it is much more likely they will get to the whole amount they need).This can be better for founders, because it often minimizes total dilution they take in the seed round. However, many founders improperly estimate the total dilution they will experience and raise too much, often making them very sad at their ownership when all of these SAFEs convert in a Series A.”

Bigfoot: SAFEs and convertibles dominate the seed stage equity market for technology companies, and we agree that this has been a positive development for Founders as it short circuits the seed capital raise process. Founders can take in money in chunks rather than having to shepherd a group of investors to a simultaneous close.The downside of this is what I call the “convertible note overdose” whereby Founders raise multiple seed-stage rounds through these instruments. Founders get into this cycle because it’s “easy” as the documentation is in place, potential investors are generally used to the docs and Founders have experience raising in this manner.What often results is Founders taking more (unnecessary) dilution leading into a potential Series A or early exit. We commonly see Founders raising on “stale” notes that have not been updated to reflect the traction the business has achieved since the last note raise. It’s not uncommon for 30-50% of the company to be no longer residing with the Founders as they’ve sold the company off piece by piece at relatively low valuations, generally without really recognizing that they’ve done so and not appreciating the dilutive impact.Today’s early-stage SaaS financing market has evolved beyond SAFEs/convertibles for venture investments as the only option. Founders now have access to other forms of capital that can help them pursue a different path. We’re one of them.

The Seed Stage Pitch Deck

Justin: Recommends six slides

  • Problem
  • Scope of problem
  • Why now?
  • Solution
  • Traction (if any)
  • Team

Bigfoot: We don’t spend a ton of time on decks. By the time an investment fits our profile, a company is generally approaching $1M ARR. So, we’re very traction/metrics and forward-looking focused to understand the growth plan over the next 12-24 months. This traction manifests in results, not a deck.

Getting intros to investors


  • The power of social proof: “You want to get an intro from someone the investor respects and/or has put her money where her mouth is.”
  • And of not taking any ‘ol intro… “Sometimes an investor who hasn’t invested will offer to intro you to another investor. Don’t take it! The signal you are sending is bad; if you were a good investment, the first investor would have invested.”

Bigfoot: Not everything needs to be warmed up. We get about 2/3rd of our deal flow via referrals (or warm intros). The other 1/3rd comes organically via inbound and some outbound we do. It’s true that the deal flow from warm intros is generally higher quality and has potentially already been vetted to some degree. That said, we regularly make investments into companies that came across our plate “cold.” For either type, we run the same decisioning process.The power of traction and experience. While input from someone we trust and respect certainly matters. The story coming directly from the business’ traction and from the Founders’ experience and passions primarily speaks to us.

3 keys to closing your seed round

Justin: Be direct. Ask pointed questions, get answers, get a commitment, don’t delay in sending paperwork for the deal. Clarify your time frames.“Don’t put an arbitrary “soon” date on your round — clarify the time so you can bring about a legitimate sense of urgency. Make it clear what date you want money in the bank, which will also filter out investors who aren’t prepared to move quickly enough.”Observe the “handshake protocol”:

  1. The investor says “I’m in for [offer].”
  2. The startup says “Ok, you’re in for [offer].”
  3. The startup sends the investor an email or text message saying: “This is to confirm you’re in for [offer]. This offer is valid for 48 hours, please confirm acceptance. You agree to fund your investment no later than 10 business days from the date of your acceptance of this offer.”
  4. The investor replies “yes.”

Bigfoot: We agree that direct conversations and a clear plan for the path to capital are extremely important. Otherwise, we are all at risk of wasting time spinning our wheels with hypothetical conversations. If you’re raising capital, commit and focus on getting it done within a set timeframe. If you’re not, don’t do yourself and potential investors the disservice of us just mutually dipping our toes.The capital raise process is a sales process. We’ve written about this here and have provided a link to a lightweight spreadsheet CRM to track it. We started in a spreadsheet and moved to Streak. If you’re a SaaS Founder with traction raising a Seed round, feel free to reach out to us.We may have a direct role to play in helping you take less dilution and get your round closed efficiently. Or, we may just be able to make some intros to VCs we know and help broaden/accelerate your process.