The right time to seek seed investment is different for every business. It’s often a time consuming process, and many startups find themselves ‘courting’ investors for a long time before they hit gold.
For this reason, many entrepreneurs start approaching investors six to 12 months before they actually need the investment. This is where the three p’s come in – planning, patience and perseverance.
Every year, The Pitch helps hundreds of founders get investment ready. We wanted to share what we’ve learnt, including advice from the seed investors in our network.
Finding suitable seed investors
Creating an investor list that’s tailored to your business is a crucial first step. It prevents you from wasting time approaching unsuitable investors and forces you to refine your reasons that they should fund you.
Investors will want to find common ground between their aspirations and yours, so be clear about what you can both gain from the relationship.
“The very first funding round is definitely about a great idea and connecting with your investors,” said Terrible founder Tersha Willis. “It’s a bit like dating. We spoke to about 30 or 40 angel investors over the course of about six months. Eventually, we found people who were fascinated by what we do and kind of just believed in us as humans.”
Create a long list of potential investors to target and research each one to decide if there is a good fit. It might seem time consuming, but it will save time later down the line.
Think about the process like a sales funnel. You need to properly identify your target customers, the investors you’re selling shares to, and approach enough of them to close your round.
How to find investors
You can find potential investors through:
- Pitching competitions like The Pitch and SetSquared
- Regional angel networks, such as White Oak Capital and Bristol Private Equity Club, which can be founder using the UK Business Angels Association website
- Lists of angels (found on Twitter and various websites)
- Gathering information about other companies that have raised funds through Crunchbase, Companies House, which includes startups’ cap tables, and local media
Preparing the evidence that you’re investment ready
Ask investors what makes startups attractive and many will tell you that it starts with passion and drive – but they also want you to back that up with evidence.
“You need to be able to highlight your background, your experience and why that’s important, but we’re also looking for real proof points to show the momentum behind your business,” said Crowdcube founder, Luke Lang.
1. Demonstrate traction
Luke advises founders to gather evidence before any meaningful conversations take place with investors.
Consider how you can showcase your traction and what metrics validate your approach; the numbers you share should help build the narrative about the opportunity.
Five common ways to demonstrate traction in a seed investment round:
- The amount of revenue generated: The total since launching (mention the time scale), or Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR) if you sell subscriptions.
- Number of customers: Total sales since launching, active customers (people that have used your service in the past month), users (free and/ or paid) or beta users. If you’re pre-launch, having a waiting list is great.
- Key partnerships: Include partners’ names if you’re selling business to business or larger brands offer a useful route to market. These could be customers or active conversations.
- Reviews and testimonials: Having reviews on platforms like the app store or Trustpilot offers great third-party validation to demonstrate what you do. Individual testimonials and case studies are helpful too.
- Market research: If you’re at idea stage, you can demonstrate customer demand through surveys, interviews and desk research.
Be honest about your numbers. You will get caught out if you try and disguise the situation and trust will be lost immediately.
2. Validate market size
You may have a great idea, but have you proven there’s a need for it? Luke stresses you should have a good understanding of your market and the opportunity for growth.
“One of the things that I look for in businesses is what big, relevant changes in the world and what trends have created this opportunity for you,” said Luke.
“When you highlight a shift in the world, you get people to open up about how that shift affects them and where they see the opportunity.”
Remember that credible, accurate numbers are better than big numbers when it comes to illustrating the market opportunity.
Make sure you understand what investors are asking for when you’re discussing your market too:
- Total Addressable Market (TAM): Sales with 100% market share
- Serviceable Available Market (SAM): The size of the market that’s in geographical reach
- Serviceable Obtainable Market (SOM): The portion of SAM that you can capture
3. Share financials
Getting your numbers in order should form the foundation of preparing for a raise, but it’s an area that can be a challenge for some startups.
“We’re looking for your projections in terms of what your profits and margins are going to be moving forwards,” said Entrepreneurial Spark chair Lucy-Rose Walker. “Make sure you show what you’re projecting in the long term over one year, three years and five years, and that you understand it in detail.”
If finances aren’t your strongest point it’s even more reason to be prepared.
This is the case for Mak Tok founder Will Chew, who provides a hard copy of his accounts as a starting point for discussion.
“Finance has always been the hardest part for me. Every time I’m asked about my finances I get really nervous, although I know the figures,” he said. “Now, I always write the numbers on my phone and have a set of accounts ready when I’m with an investor. They can look through them and I’m there to answer any questions they have.”
Also, be aware that seed investors normally want you to be registered for the Seed Enterprise Investment Scheme (SEIS), so make sure you’ve got all the paperwork sorted early on.
There are various rules you must follow so your investors can claim and keep SEIS tax reliefs too – familiarise yourself with these so you’re prepared for any questions.
Being confident about contacting investors
You’ve done your research, answered the right questions and feel ready to start having conversations. Now comes the tricky part – approaching investors and securing a meeting.
How to find and contact seed investors
Investors are time poor and approached a lot, so be direct.
Eva Tarasova is the investment director at Wharton Asset Management and advises entrepreneurs to contact the investor directly rather than waiting to be introduced.
She says the best approach is to write a short email explaining who you are and what you do and attach your investment deck or a one-page summary.
“On average we look at around six thousand companies and make about 10 investments a year. Sometimes founders also write me emails to say, ‘I’m company X, I’m thinking about fundraising. Can I have a chat with you?’ To be honest, those are the emails I normally don’t reply to.”
That said, taking a softer approach can work too, particularly with angels that are making a smaller number of investments. Try asking for a specific piece of advice that’s relevant to their background or experience. Make it easy for them to answer and hopefully, the conversation develops from there.
How to create an investment deck
A clearly presented, well-researched investment deck will set you ahead of the competition.
The goal is to convince investors who don’t know anything about your startup that it’s worth talking to you.
Be aware that investors only look at pitch decks for an average of three minutes and 44 seconds, so make sure it’s compelling, credible and concise. If a slide doesn’t add to the story, you should probably remove it. And don’t have too many words on any slide!
What to include: Seed investment deck checklist:
- Front page: Tell investors exactly what the deck is for. Show the product.
- The problem: Use evidence to demonstrate the opportunity, hint at the solution.
- The solution: Explain how you’re going to address the problem.
- Demonstrate your USP: Show your unfair advantage over the competition. The more defensible, the better.
- Financial projections: Include key milestones. Don’t extrapolate numbers you don’t have.
- The team: Why are you the people to do this? What do you have that others don’t?
- The ask: Be clear on equity and amount, and share what you’re going to spend it on. Talk about when you will raise next.
“I want to see an investment deck with a clearly defined product,” said Eva. “Lots of decks I see go on about the size of the market, that the market is broken, and that there’s a need for a solution. But they don’t clearly say what their actual product is.”
The other important thing is to explain your ask. Eva says investors need a clear idea of exactly what you’re asking for and what you will spend the money on, but this is something that many startups fail to include.
“Don’t assume the investor can read your mind!” she says. “And don’t forget to show how you plan to acquire your customers and scale after you raise your investment.”
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