Even if you work every day in the world of new-venture funding, as I do, the options are confusing, and their meanings seem to change on a regular basis. I challenge any entrepreneur, for example, to define the difference between “seed-stage” and “early-stage” financing. Yet, 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 dealing with investors. Asking forearly-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:
1. A crowdfunding campaign
Crowdfunding is rapidly becoming the major source of funding for seed-stage startups. According to recent statistics, there are already over 500 website crowdfunding platforms, such as Kickstarter, available; and over $5 billion was raised this way last year. For those of you without a rich uncle, crowdfunding can work.
2. 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.
3. 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 such notable names as Mike Maples of FloodGate Fund.
4. 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.
5. 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.
6. 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 similar small seed investments, similar to those of accelerators. Many municipalities offer these to facilitate local new business development.
7. Corporate seed funds for startups
Finally, many more mature companies, including Intel, Google andFedEx, offer seed funding to promising startups working on innovative technologies which might be good acquisition candidates later.
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 proven business model. On the other hand, investors only want to provide money for scaling a proven business model, which is on an order of magnitude 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 to entrepreneurs is that they still look 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’re one of them, don’t second-guess yourself into never starting.