The most important principle of startup fundraising that every entrepreneur needs to know is: raise enough capital to achieve a set of milestones that will allow the company to attract the next round of investment. The use of your initial friends, family, and founders (FFF) capital should be directed towards achieving the milestones that will attract seed investors (likewise, the use of your seed funding should be directed towards achieving the milestones that will attract Series A investors). Below are the milestones that you will need to achieve in order to attract seed investors and therefore the milestones that you should invest your FFF capital.
You may have gotten through your FFF round without a business plan, but in order to attract seed investors you will need a comprehensive plan complete with extensive market research and a detailed financial model. A major piece of the business plan will be your capitalization strategy demonstrating the milestone timeline discussed above as well as the effects of accomplished milestones on the company’s future valuation.
A fair amount of your FFF funding will likely go towards product development. Depending on the complexity of your product you may or may not be able to complete a working prototype or beta version with your FFF capital. If not, at the bare minimum you will need an interactable wireframe mockup that demonstrates the product. You will also need proposals for the cost to develop the minimum viable product (the features that allow the product to be deployed).
Founding Team, Key Hires, Advisory Board
Seed investors heavily weigh the importance of the startup team when evaluating an investment opportunity. The reason is simple, the company will face adversity, things will go wrong, and the plan will change. But, if the right team is in place the company can overcome the adversity, fix the issues, and adapt the plan. If you cannot afford to hire the individuals with key expertise you may need to bring them on as co-founders with an equity stake or hire a part-time, interim individual or company. You can also bring these skillsets to the organization via advisors. In any case, you should plan on having a team member, service provider, or advisor for every part of the business other than your area of expertise. For example, if you are a tech expert launching a mobile app, you will want a team member, service provider, or advisor fulfilling the following roles CEO, CFO, sales, and marketing. At this stage, it is fine for one person to fill several roles so long as they have the expertise to fill these gaps.
Be sure to budget a small amount ($2,500 – $5,000) of your FFF capital to ensure that you legally setup your firm. Work with a lawyer to ensure that you are setting up the business according to what’s best given your goals and capitalization strategy. It’s better to pay a little now and get it right rather than have to go through the costly transition down the road.
If your business can secure any intellectual property rights now would be the time to do it. Common types of IP rights include copyright, trademarks, patents, design rights, and trade secrets.
While all of these milestones are vital to the success of raising seed capital, market validation is towards the top of the list. In your pitch to FFF investors you told them that there was a need for your product in the market. In your pitch to seed investors, you will need to show investors this need. If you were able to build your product or a working prototype / beta version of your product it’s time to either get either paying customers or free users. Obtain customer feedback and demonstrate that your product is fulfilling a real market need.