Things to consider before raising seed funding
You have a startup idea, you convinced a friend to join you (or you’re going solo), you write a short document explaining the idea and how you’re going to make money. What’s the next step? Should you look for seed funding or should you bootstrap?
Looking for seed funding has become the default path many people choose right after coming up with an idea, but is that actually a smart thing to do?
Do you know why you’re raising money?
As I said, raising seed funding has become the default path to choose when starting a startup, but have you actually considered why you needed to raise money?
If you are a technical founder, have you tried creating an MVP and validating the idea first? You don’t like selling? Have you looked for a co-founder that can help you with that? Or have you looked for someone who could work for you on a commission basis? I’m not talking about asking a friend or two, have you actually gotten dozens of rejections? If you can’t find anyone who believes in the idea, are you sure it’s such a good idea? Maybe it at least needs some tweaking.
If you are not technical, and you need someone to develop the idea for you, have you first looked for a technical co-founder? Have you tried outsourcing the development of the MVP? For most ideas, an MVP shouldn’t cost you more than $10k-$15k 1. Is that a lot of money? Have you tried saving money first? How about learning just enough coding to create the MVP yourself? If you’re saying “But I don’t know if it will work, what if I waste my time and money?”, I’d say, if you can’t convince yourself this is a good idea, how are you going to convince someone else?
You can always try to (and in most cases you should) validate the idea even before the MVP. If it’s a B2B idea, have you tried going to potential customers and asking for their opinion? Have you tried looking for potential customers who might already be looking to get a similar system custom developed by a software development agency? Maybe you can give them a better deal, and have them pay for the development. They were going to pay someone anyways, why not you? If you can’t sell it to anyone, are you sure your idea is needed?
If you have a B2C idea, have you tried a simple landing page that collects e-mail addresses? Can you actually show that there is hype around the idea, or at least that people want it? Have you tried pre-selling to those people? If it’s relevant in your case, have you thought about more novel methods like an ICO or crowdfunding 2?
If you haven’t tried at least some of these methods, it is likely that you don’t actually want to do the hard work or you haven’t thought about this hard enough, and you want someone else to take all the risk. Go ahead and try some of them first before looking for outside investment. Even if you still need to raise money after that, you’ll have a much better case, hence a much better chance at raising money, and you’ll likely get a better deal.
Are you sure you’re ready for the consequences?
If you still think you need to raise seed funding, you should know that raising money is a full-time job. So, if you want to raise money, I’d recommend looking in the mirror first and saying “This is the best use of my time at the moment.” without any hesitation.
Apart from it being a time-consuming endeavor, are you sure you’re ready for the consequences of getting outside investment? As you’re likely going to be exchanging money for equity in your company, I’d recommend being really sure that this idea is something you actually want to work on for at least the next two to five years. When you raise money, you probably won’t be able to make all the shots on your own anymore 3.
I recently came across a good exercise that can help you decide if you actually want to pursue an idea for the next five years of your life. It’s from a book called “Will It Fly?” by Pat Flynn. I’ll quote it directly from the book 4:
Let’s say you’ve climbed into a DeLorean time machine and zapped yourself five years into the future. You find yourself at the airport. As you sit in the terminal, waiting for your next flight, you feel someone tap your shoulder. You turn around and your face immediately breaks into a huge smile as you recognize an old friend from school. Your friend exclaims, “I thought that was you! It’s been too long since we’ve connected!”
“Yes,” you agree whole-heartedly. “I’ve missed you!”
With some time to kill before each of your flights, you both decide to catch up over a cup of coffee. As you settle into a table, your friend asks you, “So how’s everything going? How is life treating you these days?”
You respond with, “AMAZING! Life couldn’t get any better.” And you really mean it.
Now here comes the key question:
What’s happening in your life five years from now that makes you respond like this?
Don’t even worry about the business idea in your head right now. Just fast forward into the future and really think about what would make your life, and all of the things that matter most to you, truly amazing at that point.
In the end of this exercise, you’ll have a list of points that explain why you’re happy five years from now 5. When you look at those points, are you sure working on this startup for the next two to five years going to help you achieve them?
It is actually a choice
In the end, the decision is yours. Obviously bootstrapping is not for everyone or for every type of business. Many times it’s actually better to have outside investment to speed up the growth while not worrying about making profit for a while. There are definitely times it might make a lot of sense to look for investment even years after starting a company. Just make sure you know why you’re doing it and what you’re getting yourself into.
And if you decide to bootstrap, you won’t be the only one to do that. A very good example I can think of is Nathan Barry. He created ConvertKit, an e-mail marketing tool for creators, for a web application challenge. ConvertKit has recently surpassed $1M in monthly revenue, with zero outside funding.
You can also find many other examples on Indie Hackers, a community for independent developers.
Obviously this figure can wildly vary depending on the idea, and it’s likely that you won’t get the best quality for this amount, but I believe it’s worth giving a shot. Just make sure that you are actually sticking to the “minimum” in MVP. ↩
Technically, these are also methods for “raising money,” but I’m mainly talking about raising money in exchange for equity in this article. ↩
Depending on the type of deal you’ve done, of course. Also, not making all the shots on your own can be a good thing, depending on the people you surrounded yourself with. ↩