Funding experts discuss how startups can find seed money
This July, Utah Business hosted the Funding Summit, an exclusive three-part panel discussion with funding and venture capital leaders, Katelin Roberts, general partner & COO at MedMountain Ventures; Landon Ainge, managing director of Assure Syndicates Network; Ilana Stern, partner at Peterson Ventures; and John Mayfield, partner at Album VC. Moderated by Elle Griffin, editor-in-chief of Utah Business, we’ll dive into the details of finding seed funding in any industry. Watch or read part one of the Funding Summit on pre-seed funding here.
What kinds of companies are looking for funding at the seed level?
Katelin Roberts: We often invest in companies that are pre-revenue. So sometimes they have revenue and I think the dynamics are getting even more muddled. For founders, oftentimes, if you want to save yourself some pain, it’s nice to get really clear with an investor on things like, what are you looking for? What do you invest in? For sector, what’s your check size? Getting really specific so you don’t end up wasting your time.
John Mayfield: I think it’s really when you’re ready to raise one to 2 million and you have a credible plan where that one to 2 million is your 18-month plan to hit the milestones you need to. I think a seed round is generally best when you know you’ve proven out a few hypotheses, you know you’ve got a market, you don’t have product-market fit yet, but you know you’ve got kind of your core team and you’re kind of all in on this endeavor.
Ilana Stern: At Peterson, we invest in seed and pre-seed. And in terms of where the bar is for businesses, it’s not just different across B2B SaaS and consumer, for example, but it can also be different by industry. So if there’s a really large market, that doesn’t have a lot in the way of competitors or no one doing anything similar to a certain company. There might be a different bar for what you need to see in terms of traction than if a company is entering a more crowded or competitive space. So there are a lot of things sort of contextually that can be different.
What defines the “seed” stage?
John Mayfield: I think we’re probably making too much of a distinction between pre-seed, seed, and A. They’re not certain milestones. They can happen at any point. You can skip any one of them, but I think if you can find true believers for your startup, that’s when you’re ready for it. Of course, you don’t want to give up too much of your company too early either.
I think it’s more about getting to know a lot of different investors, finding the ones [who believe in you]. Like if you’re in healthcare, you should talk with [MedMountain]. If you’re B2B SaaS, it’s us. Peterson’s really good at consumer goods and e-commerce. They might be your best bet there. And so I think it’s just networking really well and not networking in the hand shaky kind of smarmy way. It’s kind of like actually getting to know people and recruiting people into your fold and kind of almost building the religion of your startup. And so you’ll know when that money is available to you when it makes sense.
Katelin Roberts: I second that. I think the more relationships you build, the more feedback you’ll get on what milestones you need to be hitting and the considerations that you’ll need to be making as a founder on what you’ll be able to live within terms of the money you’re going to take, the dilution you want to take, the valuation that’s going to be acceptable to market. That’s really what’s going to frame the conversation in your mind of what’s going to drive your financing.
If I’m a founder, it’s not going to be like, “Oh, I’ve hit X, Y, Z milestones, or I’m going to do just what the decision of the market is.” It’s really like, “What do I feel comfortable with? What can I live with to build this for the long term and be incentivized for the long term and what relationships do I have and what people do I want to partner with?” Those are things that I’m going to be thinking about.
Ilana Stern: I think the reason you’re getting lots of different answers is because there’s such a spectrum of getting to that point of a repeatable and scalable business model. When it comes to pre-seed, it’s going to tend to be much more based on vision, opportunity, team, and there’s probably going to be very little in the way of traction. Typically with seed, you’ll have some revenue, not always, and there’ll be some signs of life in the business, there’ll be just early indicators of product-market fit, so it depends.
What are some of those early indicators that investors are looking for in particular?
John Mayfield: Signs of life. It’s going to be different for every company. Like a pharmaceutical company, signs of life might be going through a filing process with the government and hitting a milestone or recruiting a number of people to study. Whereas a B2B SaaS company is a product-led one, usage of the product. I mean, if they’re getting usage of the product and they have amazing, daily active users over monthly active users, those are signs of life.
Landon Ainge: If you’re a founder who’s never started a company and you haven’t had experience of more than 10 years in that sector, you’re going to have a higher bar convince someone to give you that much money. Your job is to sell the believer aspect of this, your job is to prove that you’ve de-risked enough that you know how you’re going to execute, what you’re going to use that money for, how it will scale your opportunity.
Katelin Roberts: We look to remove uncertainty. There are certain uncertainties that we can remove, there are certain things that we are willing to take. We have to look out into the world and say, “Okay, is this the right timing for this? Is this going up? Is this coming down? Are these things converging at the right time?” That’s where we have to sit back and say, “Okay, are we knowledgeable enough in looking at the trends, are these people right? To build this company at this time?” And then, we [have to pick] the right founders to build phenomenal companies in sectors that have the opportunity to make a really good opportunity upside, it really starts with the people which goes back to building relationships. People throw around this analogy of like, “It’s a marriage.” It’s not even a marriage, there’s no annulment, there’s no runaway bride, you are tied to these people forever. You can’t divorce investors.
Ilana Stern: In terms of the team, specifically, one of the things that we talk about a lot is the insight into the business opportunity and “Is the founder based on life experience, work experience, certain prior experience, positioned to have a unique insight into an opportunity or pain point?” A lot of it has to do with, “Where is that insight coming from, and are they positioned somehow to have a unique insight?” We also try to see, does this individual have a track record of success? They don’t have to be a repeat founder that’s had, multiple exits, we’re on our third fund now and I think we’ve backed like six repeat founders in our portfolio from fund one to funds two and three.
Have there been a lot of markets that have really exploded in the last year?
Landon Ainge: We’ve seen a lot of change with Covid. Obviously the future of work being a rising conversation, e-commerce has really taken a big trajectory. You’ve obviously seen things associated with Blockchain and crypto, and those type of things have really come forward. I’m seeing a growing in developer tools and software and software designed specifically for developers that will continue to grow.
John Mayfield: Blockchain and NFTs are going through a hype cycle right now. AI has been in the conversation for near a decade. I don’t know, there’s a lot of stuff. I think DeFi, within the crypto space, is pretty interesting. I don’t know how investible it is going to be for our fund, but we’re trying to dabble personally just to learn about it and talking with a lot of people about that stuff.
Ilana Stern: I think there’s a whole spectrum of industries that have just fast forwarded by a decade, as a result of Covid. Accelerating certain behaviors in healthcare, in e-commerce and otherwise that are really interesting. It’s a really exciting time, we’re starting to look at some stuff in DeFi as well.
Landon Ainge: I would just like to point out that despite the fact that we’re talking about all the exciting industries, there are business models that certain funds just won’t invest in. And that’s really important to understand. Nobody mentioned consumer software, right? Like social media or other things like that. Understanding your business model is the most important thing you need to understand and then figuring out, “Who are the people that would most likely invest in it?”
What are the trends you’re seeing in angel investing and how can maybe an ordinary individual get involved?
Landon Ainge: Angels are the people who will invest in you before you have revenue. Where we have the first signs of life, before you’re raising a million dollars. And so when do angels get involved? In reality, it’s just as hard of a pitch, pitching angels, as it is a fund. In fact, sometimes it’s more difficult because you have to have the conversation with 35 to 50 people just to find those three or four that you needed that were going to be your true believers, and that’s a lot of work.
John Mayfield: I’d say angels are good in both rounds. We’ve traditionally lacked significant density of angels, though we’re starting to get more, which is great in Utah, just between crypto millionaires and people getting liquidity events and just… really good market real estate. There’s lots money floating around from 25K checks to 250K checks.
But I would say angel investors want to get a good deal because they’’re taking a lot of risk, but you don’t want to screw over the entrepreneur either. You don’t want to set weird terms, you don’t want some weird precedent or some warrants, or weird wonky stuff in there because that’s limiting the upside of the growth. It’s this weird ironic thing where you want to get a good deal, you want to get a fair deal.
What terms should the founder be looking at at this stage?
John Mayfield: Probably a cap and a discount.
Ilana Stern: From a founder perspective, thinking about, “What are going to be the key success factors in my business? What are going to be the pieces that are hardest?” And, “Are there operators who have solved these types of problems or executed… led this type of business?”
Any final thoughts or words of wisdom to entrepreneurs looking for seed funding out there?
Ilana Stern: The questions I always ask myself as a founder when it came to investors, advisors, whatever was do I think about something differently after talking to them than I did before? Do their questions catalyze thought and help me sort of think about something I’m trying to solve differently? And, so I would say to invest in to founders, look for investors who help you think about problems differently. And, also people you’ll connect with and really enjoy working with. It is definitely a marathon, not a sprint to build a company. Companies fail a lot faster than they succeed. So, it’s a long-term relationship and really important.
John Mayfield: We try to invest in missionaries versus mercenaries. I think that’s an important thing for people to remember. It shows, when you’re pitching to investors, it shows when you’re trying to recruit people, it shows when you’re trying to sell the customers. And when we hear people pitch and say, “Hey, we’re just going to raise money. We’re going to flip it in two years.” That right there’s a red flag to us. Like we’re going to be in this a long time. The missionaries are doing it because it’s part of their life’s mission because they have a founder secret because they’ve explored every in and out of this industry and they know how to do it. So, missionary versus mercenary. Be a missionary.