7 Rules of Thumb for a Successful Seed Capital Round

Q: Can you share a little about a seed round you successfully closed in terms of the process, the funnel for angels and lead investor, number of warm introductions, conversations, and checks, and how long it all took?
Quick Background. I’m an entrepreneur that has raised around 65+ financings for startups (my own and others) and an active angel investor with 25 current investments. I’ve made three angel investments so far this year (two as the lead angel) and I’ve already committed to a fourth. I co-lead a local pitch competition and meet regularly with other angels to swap leads and talk about our latest investments. I’ve also had a chance to directly pitch 4 billionaires (two invested, but two did not) and I get pitched 2 – 3 times per week by entrepreneurs looking for seed rounds of $500k – $3m. Given all of that, here are a few thoughts about the process, the funnel, the lead angel, other angels, the structure, the timing, etc. 1. You Need a Lead. If you can start out your financing with an enthusiastic, well-known, actively-involved lead angel, then it is usually all downhill from there and you will likely get your round closed in a couple of months (this a number of “months” thing, not a number of “weeks” thing). If you start off with only small angels of $50k each, you will almost never get your round raised. Ideally, the lead angel joins your board and is also your main mentor to help you navigate the next few years of your life, help get you fully funded, etc. A good lead angel will always be one of your biggest fans and tell everyone they know about this deal they just invested in. Here’s a recent example of lead angels evangelizing the companies they’ve invested in:
Last week I met with the Chief Investment Officer of a family office at a local eatery to swap leads. He spent the first 30 minutes of our meeting excitedly describing his most recent startup investment while I devoured 2 baskets of chips and salsa. That’s enthusiasm. He wasn’t necessarily trying to get me to invest, he was just a typical enthusiastic lead angel investor. When he took a breath to gulp down his Margarita, I went into detail about my current favorite angel investment (I’m the lead angel and on the board of a new startup that is still in stealth mode). Each of us was the lead investor in our deals – and we were telling everyone about them.
2. Speed of Execution Matters. Whenever I’ve had a clear lead angel, my round usually moves fast. What happens when you don’t have a lead investor? It can be a frustrating and agonizing process where you burn up each small check as you get it and it only lasts long enough to live until the next small check. Here’s one of my personal experiences with slow death:
I was an investor in one startup that actually was able to survive for several years with a monthly burn rate of around $75k/month by begging for $50k and $100k checks every month prior to finally shutting down. They never got a lead angel or Venture Capital firm to invest. And because this went on for several years, they kept raising the valuation. They were raising capital at a pre-money valuation of a staggering $30m the last time I checked in prior to them going belly up. Imagine the agony of raising nearly $10m (which is what they had raised over all of those years) in $50k increments. That process literally ate up the majority of the CEOs time and left very little time to actually execute. Their revenue never topped $500k/year in the six years I was invested prior to them shutting down for good.
3. Angels Flock Together. Once you have that enthusiastic lead angel, you will usually get more angels fairly easily. Here are a couple of quick examples:
Two weeks ago over breakfast with a good friend, he and I both committed to investing in each other’s real estate deals within just 15 minutes of small talk while we were waiting on our omelets. We are basically swapping investments and leveraging each other. Several years ago one of my business school classmates called me to tell me about a recent angel investment and confidently told me that I needed to hurry up and invest. I wired funds the next day without ever reading anything about the company. It was good enough for me that my friend was recommending it.
I was a contributor and a case study example in the book on angel investing published by Prentice Hall titled Winning Angels: The 7 Fundamentals of Early Stage Investing. Here’s an example of how the angel network of influence played out in my startup that was profiled in the book. I initially incubated the profile startup inside of a previous startup and then spun it out separately. I had two angel/seed rounds in the subsequent startup. The first was $600k that took about two months to close and the second was $3.6m seed round that also took about two months to close (I opened that round immediately after closing the initial $600k round): First Round – $600k, 8 Angels, 2 Months to Close: Founding Angel:
  • Profile: Partner in a Venture Capital firm that invested in my initial startup and that ended up incubating the startup in this example
  • Connection to my startup: He was the older brother of a good friend of mine that seeded my initial startup and enthusiastically helped me launch this new startup as my co-founder
  • Amount invested: None in this next startup, but had a substantial equity position as my co-founder
Angel #1
  • Profile: Well-known local high net worth entrepreneur and investor investing through his family office, former CEO of two publicly held firms that he had built and exited.
  • Connection to my startup: Business associate of my Founding Angel; they had been co-investing in startups for 20+ years
  • Amount invested: $150k
Angel #2
  • Profile: Local entrepreneur that had built and recently sold a startup for $50 million and was in the middle of his next startup (I also invested in his second startup and was on his board)
  • Connection to my startup: I met this angel via an entrepreneur friend from church that was also in the middle of launching his own startup. Angel #2 and I were both advising our mutual friend and then and ended up investing in each other.
  • Amount invested: $50,000
Angel #3
  • Profile: CEO of a global retailer, former top Fortune 500 executive, and former McKinsey partner
  • Connection to my startup: On the board of Angel #2’s startup along with me, where we got to know each other well
  • Amount invested: $100k (he also invested another $150k in the next round)
Angel #4
  • Profile: Local angel investor that had been an investor in Angel #2’s business that he recently sold
  • Connection to my startup: Introduced to me via Angel #2
  • Amount invested: $100k
Angel #5
  • Profile: Former partner in Angel #2’s business
  • Connection to my startup: Introduced to me via Angel #2
  • Amount Invested: $50k
Angel #6
  • Profile: Recently retired Chief Marketing Officer of a major division of a Fortune 500 financial services firm
  • Connection to my startup: Introduced to me by my Founding Angel
  • Amount invested: $50k
Angel #7
  • Profile: Top ten partner at Accenture, the world’s largest IT services firm
  • Connection to my startup: Introduced to me by my Founding Angel
  • Amount invested: $50k
Angel #8
  • Profile: Partner of a $500m hedge fund
  • Connection to my startup: Close friend and business school classmate
  • Amount invested: $50k
Second Round – $3.6m, 29 Angels, 2 Months to Close: Here’s an example of how the influence of the angels in my First Round played out in my Second Round. To keep this short, I will highlight just two of the angels in the First Round and how they impacted the next round: Angel #3 Introductions Led to These Investors:
  • CEO of Fortune 500 company: $100k
  • CFO of Fortune 500 company: $50k
  • Vice Chairman of global investment bank: $100k
  • Retired CEO of Fortune 500 company and prominent angel investor: $100k
  • High-profile publicly-traded tech CEO and his COO: $200k
Angel #8 Introductions Led to These Investors:
  • Several senior partners for Wall Street’s top three investment banks: $850k
  • Several hedge fund partners: $725k
That’s how lead angels operate. They flock together. They are enthusiastic. They bring in other investors. They swap deals. 4. Angels Can Lead to Series A and B and Beyond. Incidentally, those partners from the top three investment banks all jockeyed for prominence in hopes of leading an eventual IPO and one of those investment banks invested $25m in our Series A and Series B, all of which can be traced back to my initial angel investors and the web of relationships that led to a total of $75 of capital that was eventually raised for this one startup profiled here. 5. Seed Rounds Generally Follow a Pattern. I’ve noticed a pattern that looks something like this in terms of the funnel and the number of investors (using a $2m seed capital raise example): 21 Note that you may not get a lead as sizeable at $500k in a $2m raise, but many times a $100k – $250k lead angel will lead in influence as much as in the amount of capital. In addition to the above, there are always one or two guys that can only put in $10k or $25k that beg you to be able to put in less than the minimum. I always let them in, knowing that they may turn into future, larger investors, plus it’s nice to be able to say you are oversubscribed. (Be sure your SEC filings allow you to take more than you are targeting to avoid multiple filings). 6. Lot’s of False Positives. The amounts of the raise, of course, will vary, but there is usually a breakdown similar to the above in terms of the distribution of the size of investment as well as the funnel metrics. Trust me, many potential investors will look you dead in the eye and say “I’m in”, but then never return a call. And, if you are able to track them down, they will give you a lame excuse. Some typical excuses I’ve received after an initial enthusiastic commitment:
  • “I’ve taken a hit in the public market”
  • “My wife decided to redecorate”
  • “I’ll have to run it past my wife and haven’t had a chance to discuss it yet”
7. Network, Network, Network. You can see through some of my experiences shared above with just one of my startups that networking is critical. And not just networking with investors, but also networking with other entrepreneurs with a genuine interest in helping them. I rarely meet an entrepreneur I don’t instantly like and respect (knowing how difficult it is to be an entrepreneur) and it almost always leads to something good when I invest some time with them.