SeedFunding101_SFStartupDay

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Seed Funding 101
Charles Hudson, Precursor Ventures | April 18, 2018

About Me
Originally from just outside of Detroit, Michigan
Venture Experience
• Founding General Partner, Precursor Ventures
• Partner at Uncork (SoftTech) from 2011 - 2015
• Worked for In-Q-Tel, CIA’s venture capital fund from 2000 - 2003
Work Experience
• Worked at Google in Business Development
• 5 years in games industry
• Started two companies

About Precursor Ventures
In many ways, Precursor operates like an angel investor with a bigger
checkbook
• We invest in companies “pre anything” and are happy to invest in a
talented team without traction
• We write checks of $100-250K into “pre-seed” rounds of $1 million or
less
• We invest in 15-20 companies per year across the US and Canada
• We don’t take Board seats but work hard to be helpful and useful

The Evolution of Seed Investing

Seed Funding In the Early Days (Before 2000)
Institutional seed investing is a fairly new category of investing
• Series A firms used to back early-stage, pre-launch companies as part of
their business model
• These rounds often resulted in massive dilution for the founders
• Bootstrapping and supporting a company with early customer revenue
or savings was fairly common
• This was a slow but common way to get new companies off the ground

Emergence of Institutional Seed Funds (2004-2007)
The “micro VC” movement arose to help companies get from the friends
and family round to Series A financings
• Seed rounds were routinely < $1 million in size; a $1.5 million seed
round was considered large
• Many companies raised seed rounds with limited or no traction, including
pre-launch products and incomplete teams
• Goal was to get a product launched and get some early data

Seed is Now the New Series A
Seed rounds have become the new Series A rounds - you needed traction,
data and proof to attract investment
• Seed funds had gone from $25 million in size to $100 million in size in
less than a decade. They now care more about ownership and check size.
• The bar for Series A rounds has gone up and seed investors want to see
more before investing.
• Because seed rounds require traction and evidence, someone needs to
work with companies that are too early for seed investors

Pre-Seed is the New Seed Round
As institutional seed rounds have started to look and feel more like Series A
rounds, pre-seed investors have emerged to fill the gap
• Pre-seed investors invest in rounds of <$1 million to help early stage
companies get started (sound familiar?)
• The goal of a pre-seed round is to help a team get the traction required
to meet the threshold set by seed investors (sound familiar?)
• By and large, pre-seed investing is being led by new firms (Precursor,
Afore, Bee Partners, Notation Capital) as opposed to existing firms

Raising a Seed Round Today

Repeat or Famous Founder
These folks get the benefit of the doubt
• Able to raise more money to start
• $2M - $5M
• Able to raise on higher valuations
• $8M – $10M+
• Fewer requirements to show proof prior
to fundraising
• Expectation that they will “figure it out”
and build a great business based on
reputation
Two Distinct Markets for Seed Funding
First Time or Lower Signal Founder
These folks very much have to prove it
• Typically start off by raising a pre-seed of
F&F round to get started
• $250K - $1M on $2M - $4M
valuation
• Need a launched product with metrics to
unlock the seed round
• Still raise less in seed round on average
• $2M - $3M
• Also raise on lower valuations
• $6M - $8M

Step 0: Are You Ready to Raise a Seed Round?
The most critical question to answer before raising a seed round is whether
you are in fact ready to raise outside capital from investors
• Is your company’s house in order?
• Clean cap table, legal documents in order, core team members on board and
committed
• Do you have a plan for what you will do with the money?
• Have you built out a financial plan and a narrative of what you will do with the
money?
• Does your plan yield an interesting, high-growth company at the end of the
investment?

What to Expect When You Raise a Seed Round
Raising a seed round is a process and you need a plan to be successful:
• I advise our portfolio companies to allow 3-6 months to raise a seed
round
• It takes time to get from first meeting to due diligence to close
• You’ll meet investors in waves and there is some serendipity in finding people to
say yes
• I expect that it will take 40-50 investor introductions to pull a round
together
• Every investor has his or her own set of criteria that they want to see before they
say yes
• Investors will say yes or no for a variety of reasons, you need a large top of funnel

Typical Seed Round Structures and Terms
Most seed rounds are done as priced rounds with a set pre-money valuation
• Most seed rounds are $2-3 million in new capital
• Typical dilution is anywhere from 15-30%, depending on round size and valuation
• Priced rounds are by far the dominant structure for most seed rounds
• Some investors will invest in seed rounds done on a SAFE or convertible note
• Seed rounds will generally convert any prior notes / SAFEs that you issued
previously
• Board seats are common in seed rounds, but not always offered

Step 1: Build a Plan and a Deck for Your Fundraise
The two most important things you need to support your fundraise are a
good presentation deck and a compelling financial plan for how you’ll use
the money
• Start with the plan
• Build out a financial plan that shows how you will use the money in 18 months
• The plan should show an interesting, high-growth company at the end
• Understand where your plan puts you relative to Series A expectations
• Build a solid presentation that talks about your company and market
• It’s totally worth the money to have a professional designer work on the visuals
• Practice pitching your deck on other entrepreneurs and friends before you pitch
VCs
• Know your audience and follow conventions for how to organize your slides

Step 2: Find a Lead Investor
To get your seed round done, you will (likely) need a lead investor:
• A lead investor will set pricing, valuation and terms
• A good lead investor has a sense for the market and will determine pricing
• In addition to valuation, a good lead investor will also help set other key terms
• A lead investor will do the bulk of the due diligence on you and your
company
• A good lead will investigate and identify any issues that could be issues for your
company
• A good lead investor will clean up anything amiss on the legal / cap table front
• A good lead investor will help you find the rest of the capital you need

Step 3: Fill Out the Rest of Your Round
Once you get your lead investor, you need to fill out the rest of your round:
• What matters to you?
• What do you want to get out of your investors? What kind of relationship do you
want to have with them?
• Value-add vs. Passive capital
• Value-add investors can be really helpful, but you will often need to invest time to
unlock that value for your company
• Investors who believe in you vs. investors who believe in the business

Step 4: Drive Your Round to a Close
Your round will not close on its own – you need to drive it to a close
• Work with your lead investor to figure out a reasonable amount of time
to close the round
• Decide on whether you will have only one close or multiple closes for the
round
• The value of having a firm closing date is that it forces investors to make
decisions and gives them a timeline by when they need to finish their
work

Understanding VC Speak When Raising a Seed Round
These are all different flavors of no, some of which mean not now and
others which mean never:
• “We are definitely interested, come back to us when you have a lead
investor”
• “We’d love to take another look when you have a bit more traction”
• “I couldn’t get my partnership over the hump on this one”
• “This feels early but we’d love to stay in touch”

From Seed to Series A

The Series A Clock Begins When Your Seed Round
Closes
Once your seed round closes, the clock on your Series A round begins
• Your seed investors will want to make sure that you are thinking about
the metrics you need to hit to get a Series A round done
• While Series A metrics are relative and not absolute, a good seed
investor will help you understand where you need to be in terms of
metrics to get a good Series A round done
• It’s important to use the time period after your seed round closes to take
stock of your company and your team and figure out where to make
changes

Thinking About Your Series A
I am skeptical that there is a magic formula of performance metrics that will
unlock your Series A round. But I do believe in some basic principles:
• While seed investors might make as many as 8-10 investments per
Partner per year, most Series A investors only make 2-3 investors per
year
• Your true competition is every other company looking to raise at the
same time you are raising
• At Series A, your competition will be better on average and there are fewer slots
• The “Can You Return My Fund?” question for large Series A firms

SeedFunding101_SFStartupDay

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