Even if you are like me and you work every day in the world of new-venture funding, the options are confusing, and their meanings seem to change on a regular basis. For example I challenge any entrepreneur to define the difference between “seed-stage” and “early-stage” financing. Knowing this distinction is important.
Remember, you have only one chance to make a great first impression, so it helps to know the lingo when you deal with investors. Asking for early-stage money before you have customers and revenue will likely kill your credibility with real investors.
Seed-stage, meanwhile, is technically that critical period when you need funding to do solution-and business-model development to prove that your new product or service works, before you try to sell it to customers. Most investors won’t touch a first-time entrepreneur at this stage.
Luckily, there are some new entrants and approaches to seed-stage funding—if you know whom to ask—that can supplement the friends, family and bootstrapping approaches traditionally recommended. Here they are:
- A crowdfunding campaign. Crowdfunding is rapidly becoming the major source of funding for seed-stage startups. According to recent statistics, there are already more than 500 online crowdfunding platforms available (i.e. Kickstarter); and over $5 billion was raised this way last year. Crowdfunding can work for those of us without a rich uncle.
- A seed-stage “super angel.” This is a relatively new term loosely applied to angels who invest their own money in a portfolio of startups (typically 20 or more) and are willing to lead multiple rounds, usually starting with a seed round. Ron Conway of SV Angels and Reid Hoffman, LinkedIn’s founder, are names often mentioned in this category.
- A micro venture capital firm. Micro-VCs, by definition, are firms that invest institutional money (meaning other people’s money) in projects that are at the seed stage or are too small to attract the attention of more traditional venture capitalists. Currently, there are about 250 micro-VC firms, including notable names like Mike Maples of FloodGate Fund.
- A “genesis” venture capital round. A new VC seed market has been emerging, especially over the past five years: It usually appears in the form of a prototypical seed round of $1 million to $1.5 million and is normally syndicated from one to three institutional seed investors or larger VC funds. These funders often offer convertible notes, rather than the traditional priced equity.
- Business accelerator funding. Business accelerators like YCombinator and TechStars are sometimes able to help startups looking for seed-stage funding. Most accelerators provide small seed investment in the range of $25,000, as well as mentoring, workspace and professional services, in exchange for an equity stake in the company.
- Startup incubator seed funding. While an accelerator offers a specific program to startups for a fixed period of time, usually 90 days to four months, incubators tend to be more open-ended. Yet, they often provide small seed investments similar to those of accelerators. Many municipalities offer these to facilitate local business development.
- Corporate seed funds for startups. Finally, many more mature companies such as Intel, Google and FedEx offer seed funding to promising startups working on innovative technologies that might be good potential acquisition candidates.
Finding funding at the right time is the entrepreneur’s conundrum, since most founders believe that they wouldn’t even need an investor if they already had an existing product and a proven business model. On the other hand, investors only want to provide money to scale a proven business model, which is less risky than implementing and proving a new and innovative solution.
Ironically, the new, relative abundance of seed-stage opportunities has led some experts to warn startups of a phenomenon known as the series-A crunch, or shortage of early-stage or later investments.
My recommendation is that entrepreneurs search for startup funding one step at a time—from an idea in their heads, to a real product (seed stage), to a scalable business (early stage), to the success they deserve (IPO or acquisition). If you are an entrepreneur, don’t second-guess yourself into not starting.
Image Credit: CC by Rex Hammock
