How to raise a seed round in today’s economy: Insights from First Round Capital

TL;DR

Meka Asonye, a partner at First Round Capital, shares valuable insights on seed funding, including the definition of seed rounds and how they differ from precede, angel rounds, and Series A. He also discusses the importance of proving customer pull and the optimal time to raise a seed round.

Transcript

Rama: Hi, everyone. I'm Rama from Stripe   and today I have the enormous pleasure of kicking  off the Stripe Investor series where we talk to   top investors with the goal of sharing insights  that will be helpful to founders. The next one   after today is scheduled for March 7th with Susan  Ventures, and watch out for future ones as well.   Today,... Read More

Key Insights

• 🛝 Seed rounds are the first or second round of institutional funding and follow a well-thought-out idea from founders or teams.
• 🤘 Founders can secure seed funding without revenue by demonstrating customer pull and early signs of traction.
• 🤨 The optimal time to raise a seed round is when a founder has conviction in their business and doesn't urgently need funding.
• 🕴️ VC funding is best suited for businesses with a large total addressable market (TAM) and the potential for a venture scale return on investment.
• 🤩 The quality of revenue, market size, and competitive analysis are key factors investors consider during the seed funding process.
• 😤 Founders should focus on team-founder fit, market understanding, commercial insights, and velocity to attract seed funding.
• 🥰 Metrics such as MRR/ARR, usage, customer love, and net dollar retention are important indicators of a B2B SaaS company's health.
• 🌱 Startups should balance growth with unit economics and have a plan to become more efficient over time.
• 🧑‍🏭 The buyer's mentality and ability to measure ROI are critical factors in selling to customers in 2023.
• 😤 Sales leaders and revenue-focused teams are attractive prospects for B2B SaaS products.
• 😀 Founders should be transparent about the risks and challenges faced by their business and target their fundraising efforts to the right investors.

Questions & Answers

Q: How have seed rounds evolved over time?

Seed rounds have seen an increase in post-money valuations, ranging from $15 million to $40 million. However, the core concept remains the same, with seed rounds being the first or second round of institutional funding for founders with a well-thought-out idea.

Q: Do founders need revenue to secure seed funding?

Revenue is not a requirement for seed funding. It is more important for founders to demonstrate customer pull and early signs of traction, such as trials, pilots, or design partnerships, which prove that the business offers a must-have solution.

Q: When is the optimal time to raise a seed round?

The ideal time to raise a seed round is when a founder has conviction in their business and wants to commit the next 10 years to it. Ideally, founders should raise when they don't urgently need funding, showcasing their business's potential for rapid growth.

Q: What types of businesses are not a good fit for VC funding?

VC funding is typically reserved for businesses with a venture scale, meaning they have a credible path to generate $100 million to $200 million in annual recurring revenue (ARR). Businesses without the potential to reach this scale or offer attractive returns may not be suitable for VC funding.

Key Insights:

• Seed rounds are the first or second round of institutional funding and follow a well-thought-out idea from founders or teams.
• Founders can secure seed funding without revenue by demonstrating customer pull and early signs of traction.
• The optimal time to raise a seed round is when a founder has conviction in their business and doesn't urgently need funding.
• VC funding is best suited for businesses with a large total addressable market (TAM) and the potential for a venture scale return on investment.
• The quality of revenue, market size, and competitive analysis are key factors investors consider during the seed funding process.
• Founders should focus on team-founder fit, market understanding, commercial insights, and velocity to attract seed funding.
• Metrics such as MRR/ARR, usage, customer love, and net dollar retention are important indicators of a B2B SaaS company's health.
• Startups should balance growth with unit economics and have a plan to become more efficient over time.
• The buyer's mentality and ability to measure ROI are critical factors in selling to customers in 2023.
• Sales leaders and revenue-focused teams are attractive prospects for B2B SaaS products.
• Founders should be transparent about the risks and challenges faced by their business and target their fundraising efforts to the right investors.
• Building a strong and authentic relationship with investors is crucial for long-term success.

Summary & Key Takeaways

• A seed round is usually the first or second round of institutional funding and typically follows a founder or team having a well-thought-out idea before building the product.

• Series A rounds are for businesses that have achieved escape velocity with significant paying customers, while precede or angel rounds involve building an idea and establishing commercial pull.

• Founders without revenue can still secure funding by demonstrating customer pull and early signs of traction, such as trials, pilots, and design partnerships.

• The optimal time to raise a seed round is when a founder has conviction in their business and needs capital to scale the team and accelerate growth.

• Not all businesses are a good fit for venture capital funding, as VCs typically seek businesses with a large total addressable market (TAM) and the potential for a 100x return on investment.