Easy response – the kind of investor that makes money! Sure, who doesn’t want that? However, with seed-stage startup investing, the answer is more complex.
During seed-stage funding, business founders are not just looking for money. They need investors who can help beyond writing a check. This is the critical period when founders develop their business model, prove their concept, and work to earn customers. Simply put, the founder has planted the seed and needs investor support helping it grow.
We all hear about the startups raising millions of dollars across multiple rounds from venture firms and private investors. The story not prevalent in the news is that those million-dollar businesses started out just as small ideas in search of support. These first-time entrepreneurs often bootstrapped their businesses, asked for help from friends and family, and looked for seed-stage investors willing to take a risk on their vision.
If you think seed-stage startup investing might be for you, ask these eight questions:
1. What are my investing priorities?
Every investor hopes to make a return and there are plenty of places to do that. However, seed-stage startup investing usually includes personal goals beyond the financial gain. Are you looking to make a social impact? Do you want to network with other investors? Are you looking for industry connections? Are you driven to share expertise? Do you want to learn a new industry? It is important that you can articulate for founders why you are looking to invest.
2. Am I a passive check writer or an active business supporter?
Financially savvy people know how to put their money to work. For seed-stage startup investments, really consider whether you want the money to work for you, or if you are willing to work for the money. These founders need investments other than financial. They need investments of time, connections, and mentoring. Does the opportunity excite you enough to investment more than your money?
3. Do I want to provide “follow-on” funding?
Business concepts that take off almost always need additional investments over time. Know how long you are willing to stay connected. Do you want to be the first call the founder makes when it’s time to raise more capital? What metrics will you want to see to keep investing?
4. Do I offer “smart money”?
Essentially, will your investment help open doors for the founder? Smart money includes industry affiliations, expert connections, potential customers, and links to other possible investors. Your money works best when the business founder can operate at her/his best. Ensure your investment helps them learn, sell, and create more.
5. How will I respond to reforecasting and business pivots?
Seed-stage startups often still are proving out their business concept. They are advancing the product or service and testing the market. It’s not uncommon for the business to evolve during this time. This may mean more development or different manufacturing that could impact the initial financial forecast. Maybe customer feedback indicates a different direction for the business requiring a pivot. No founder can predict the future accurately. Are you okay with that? Are you comfortable with changes as the business develops that may impact your initial expectations?
6. How much communication do I need to receive?
Have an honest conversation with the founder up front on how much information you want to receive and how frequently as the business develops. Some investors feel secure with monthly newsletters and quarterly board meetings. Others want more frequent, direct communication, especially during times of change. Make sure you and the founder are on the same page.
7. What is my due diligence process?
There are plenty of outstanding seed-stage startups looking for your investment. What factors would make you pick one over the other? Investors frequently consider:
Founder experience – this may include their background in leadership or the industry
Ancillary service structure – founders can’t know and do everything, so they need support services like lawyers, developers, marketers, and accountants
Board composition – the board should offer well-rounded expertise to guide the founder
Other investors – this offers insight into the types of investors the business has attracted
Business mission – the unique problem the business solves
Founder passion – founders should love the business and have skin in the game because sometimes the founder inspires investors just as much as the business concept
Traction – the progress made toward achieving sales goals and financial forecasts
Market size – the true growth potential of the business based on prospective customers
Competitive advantage – the differentiating factors of the business unique to competitors in the space
Exit strategy – the business’s potential buyer targets and timeline for selling
8. How patient can I be with my investment?
Many investors ignore the seed-stage round because making a return isn’t quick. And, as with any investment, the return isn’t guaranteed. However, with high risk comes high reward. Seed-stage startup investors typically are the first investors. This means they can fund a company at lower valuations, which could result in a better equity rate over the long term. Before you get started, know how long you feel comfortable having your money invested. Typically, investors don’t see a return until they are bought out or the business sells, which could take years. Nevertheless, with seed-stage investing, patience is not only a virtue. It could add a great deal of investment value as well.
The Startup Ladies represents one of Indiana’s best ways to find founders that fit your investment goals. If you are ready to become a seed-stage startup investor, become an Investor Member and attend the next Startup Investing 101. These monthly meetings consistently train and educate new investors, as well as offer exclusive first looks at pitches from investor-ready businesses. This article previews just some of Startup Investing 101’s unique content for first-time investors.