Anyone who says finding funds to offset a startup is easy to come by would be living in self-denial of reality. It is no gainsaying that the difficulty involved in getting the attention of a credible investor as well as getting them to invest in a startup is a tedious one. This process without any doubt could be time and resources consuming.
The status quo could, however, be changing, especially the funding environment. It is becoming a norm that founders fund their startups on their own, or get help from their immediate family and friends, while some request and receive help from third party, also called “seed funding”; a kind of fund that is invested at the very early stage of a company. This kind of fund is usually channeled into initial preparation that would bring the company to the fore.
Seed funding, as much as it might help behind the scene of a startup, is risky and the risk involved is not unknown to the investors.
They are fully aware that not all companies they get to fund will flourish, in fact, about 7 out of 10 are likely to fail where only 1 could actually bring them the returns they desire and make them rich.
Despite the risk, they have foreknowledge on how to play the game of investment, so they keep their head in the game in order not to miss out on the next big success that might be becoming.
Many more risk investors are evolving, so seed funding is also gaining more ground and becoming more accessible for those who might be considering it.
Many startups will find this growing readily available pool of seed funding very soothing, knowing well that making an early appearance in the market is of utmost importance. This new development, despite being great news, could pose a threat to startups.
Taking on early seed funding will require the startup to make major commitments to meet the target within a specific period of time.
Taking up this type of funding could make it difficult to access other rounds of funding when it will be subsequently required in the nearest future, like Series A, which is significant and complex, and usually more difficult to access.
Inability to meet previous benchmarks could disqualify a startup from getting other rounds of funds as it sends a strong negative signal to subsequent investors.
We borrowed the thoughts of seasoned entrepreneur and investor, Kopelman Josh, who is also a founding partner at First Round, an investment company that “helps seed-stage companies become the next big thing”.
He discussed the “Series A crunch” or subsequent fundraising challenges startups may encounter with the current surge in seed funding.
According to him, the primary problem is that the availability of series A funds has not changed despite the rise in seed fundraising which has changed considerably over the years.
This implies that if four startups were to get the early seed funds, four times the startups will also have to compete for series A funding for a later round. Hence, the opportunities that abound in series A, if not changed, increase the competition and difficulty to access later rounds of funds.
Thus, not just considering the easy access to seed funds, founders of startups should be diligent when considering and preparing to get seed funds or they might find it difficult to access later rounds of funds which will be instrumental in future growth of their startups.
Kopelman Josh further made a few recommendations that startup founders should consider when they have chosen to get early-stage seed investment.
Do not get carried away by the surge in seed funding. Just because early-stage seed funds are easy to come by does not imply that getting future rounds of funds will be that easy. You just might be wrong.
As a founder, do not rush to choose just any seed-round investor for your startup. Be patient enough to select experienced, resourceful investors, who will also be willing to help out with future rounds of fundraising for your startup.
Watch out for developmental key points that will nudge you to take the next developmental step for your startup. It is important to familiarise yourself with the business key inflection points as it would help you to keep track of your successes and communicate the same to investors.
The startup should make sure to get enough seed funding that will propel it on the runway of success. This will help the startup to meet necessary benchmarks on its way to the top. Important data, that will be useful in securing future rounds of series A, should be taken and recorded.
There is a need to monitor and speak to important financial figures, including burn rate and customer acquisition cost and any other data that investors are likely to require.
If the goal is series A funding, there is a need to be rational about the amount to raise because it is easier to start with a low target and then increase the target in a later round if need be. To start on the high side and later fall back to a low would not speak well of your startup to investors, so it is wise to make the right decision.
Do not begin to seek another process of series A funding if your startup has not met major developmental milestones. Starting out to seek funds too early and getting turned down is a bad signal that might push VC firms and investors away from investing in your startup. According to Kopelman Josh, it might be impossible to get a second fresh outlook once the initial look has been rubbed in the mud.
As a startup, it is important to not get distracted by the time-consuming funding cycle. It could be energy and resource-draining. Rather, look towards the future by planning and staying focused on growing your business, in order to achieve more success and lead your team.
Don’t miss important articles during the week. Subscribe to techbuild.africa weekly digest for updates.
