I am a big fan of bootstrapping, but I am also a big fan of creating a global company that creates value for millions of people. To be able to take the leap from a bootstrapped startup into a global business, you need funding. For the past few months, I have been working on putting together a $600k seed round for my startup Bungalo, and here are a few of the things that I have learned.
Seed Round vs. Series A
I always thought the seed round would be easier than the Series A round, as the amounts in the seed round are usually much less than they are in the Series A round. So I thought it had to be easier to raise $400k–1 million (seed round) than it is to raise $2–5 million (Series A). But what I have learned from dealing with VCs in the past few months is that most of them are much more interested in coming in during the Series A round. From what I have observed, the reasons are usually the following:
Due diligence: VCs have to do the due diligence on the businesses they invest in, and it’s usually the same amount of work for a business they invest $100k in as it would be for a business they invest $10 million in. So most VCs want to do the big deals rather than the small deals since it is the same amount of work for them.
Less risk: The difference between businesses raising a seed round and those raising Series A is usually huge from the investor’s perspective. Businesses in the Series A round usually have proven everything about their business and how they intend to grow to give the investor a 10x, 20x, or even 100x return on their investment. Seed round businesses usually still have some things to prove, making them a bit more uncertain for the investor.
Fear of leading: Investors always feel better about investing in your business if they know that somebody else has already done so.
Talk to More VCs!
There are many things that have to line up for you to get a good investor to invest in your business, such as:
They have to like you and your team.
They have to like your business and believe in it.
You have to like, trust, and want to work with them.
Your business has to be in line with their investment strategy.
Preferably, they must have experience, knowledge, or networks that add value to your company.
And they must be willing to put money into your business.
Most of the founders I know (myself included before I figured this out) would go to all of the investors or VCs in their city or area, and when they would get a “no” from them all, they would conclude that there is no money to be had. But here is the problem with that: to find the right VC to work with, you usually have to pitch to at least 10–20 VC funds before finding the right one for you to work with. I started my business in Iceland, which is a small market, so there are very few VC funds. Today there are two VC funds investing in seed rounds and two VC funds investing in Series A rounds. Therefore, the likelihood that I will find a VC to work with in Iceland is very limited. I also incorporated in Canada last year and have an office in Halifax. In Halifax, there is one VC fund investing in seed and two in Series A. So no matter where you are in the world, you most likely have to go outside your local market to find enough VC funds to pitch to before you find the right match.
It’s Extremely Time-Consuming
I had heard this from so many founders before, but I still didn’t fully realize how time-consuming it is until I actually went through the process myself. If you are a solo founder like myself, then prepare for your whole business to slow down while you look for investors because so much of your time will go into meetings, communications, gathering information, preparing documents, pitching, improving your pitch, pitching again, traveling, etc. It really is a full-time job to find an investor.
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