Startups that raise seed funding face the risk of not being able to raise additional money. This is what is sometimes known as “financing risk.”
If you are a company that is just raising seed funding, financing risk should be at the top of your mind. Here are some tips for mitigating it:
– Start by thinking about the next round of financing and work backwards. What milestones do you have to hit to get VC funded at an upround? If you are a consumer Internet company, the milestone probably involves getting a certain number of users. If you are building hardcore tech, it probably means building a working prototype. Basically, you want to take the main risks that exist at the seed stage and eliminate as many as you can. A good way to discover what milestones you need to hit is to talk to as many VCs as possible. Experienced seed investors can also advise you on this.
– Raise enough seed money. How much money will it take to hit those milestones? A good rule of thumb is 18 months – three months to get going, 12 months to execute, three more months to raise VC. But it really depends on the specifics of the milestones, your operational plan, etc. which is why you need to figure those out first.
– Preserve cash. Pay only subsistence wages but be generous with equity for great people (this also provides a screen for hiring people with the right startup mindset). Keep legal fees low (try to keep incorporation and financing costs to $10K or lower – this is one reason I prefer convertible notes). Act like a scrappy startup.
A rule of thumb is a successful Series A is one that is led by quality VCs with a pre-money at least 2x the post-money of the seed round.