Fundraising

How to Get Seed Funding: The Ultimate Startup's Guide

Written by

Lineke Kruisinga

Published on

September 11, 2024
Image shows a dollar sign intertwined with a leaf, symbolizing growth after securing seed funding for startups
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You’ve successfully launched your MVP and are beginning to see the first signs of traction. Now, the real challenge begins: scaling. This often involves upgrading your equipment, expanding your office space, and growing your team. But more importantly, it means fueling your growth—and that usually requires securing outside capital.

After the initial phase of Pre-Seed funding, which we discussed in our previous article here, the next critical step is Seed funding. This round of funding is crucial as it provides the essential capital needed to scale your operations and take your startup to the next level.

In this brief guide, we’re breaking down what every startup founder needs to know about raising Seed funding to get your startup company off the ground. If you’re a founder gearing up to raise your Seed round, our guide below is here to help.

What is Seed Funding?

After the Pre-Seed stage, the next milestone is Seed funding. Seed funding helps transform an idea into a functioning company by providing the necessary capital to build out products, hire key team members, and expand market reach.

Seed funding and pre-seed funding may seem similar, but they serve distinct purposes in a startup's journey. Pre-seed funding is often the very first step founders take when they are just getting their idea off the ground. At this stage, the focus is on transforming a concept into a viable business. Founders often rely on personal savings, support from friends and family, or bootstrap methods to cover early expenses.

After securing seed funding, startups can move on to raising more money through additional funding rounds, like Series A, B, and C. 

Read more on types of funding:

Seed vs. Series A: a Showdown of Funding Rounds

How to Get Pre Seed Funding | The Ultimate Startup's Guide

From Seed to IPO: A Comprehensive Guide to the Different Funding Types for Startup Businesses

Why Raise Seed Funding?

Seed funding often makes a bigger impact on a startup's success than later investment rounds, despite typically being a smaller amount. Here's how seed funding shapes a startup's future:

Laying the Foundation
This early investment helps startups set up critical operations, bring in key team members, and kick off product development. It's the foundation on which everything else is built.

Driving Early Growth
With seed funding, startups can focus on refining their product or service and start building a customer base. This initial growth is essential to show potential for scalability and long-term success.

Opening Doors to Future Funding
A successful seed round not only brings in capital but also validates the startup in the eyes of future investors. It often paves the way for more significant rounds, like Series A, proving that the startup is more than just an idea—it's a viable, growing business.

Gaining Valuable Partners and Mentors
Seed investors often offer more than just money; they bring advice, industry connections, and mentorship. Their guidance can be crucial in overcoming the early challenges of running a startup.

Maintaining Flexibility
Seed funding usually comes with fewer strings attached, giving startups the freedom to experiment and pivot as needed without the heavy expectations that come with later investment rounds.

Building Credibility
Receiving seed funding serves as a stamp of approval, enhancing the startup's credibility with customers, partners, and future investors. It signals that experienced backers see real potential in the business.

When is the right time to raise seed round funding 

Raising money is all about the right timing and a solid pitch. Investors are ready to invest when they hear an idea that excites them, believe in the team’s ability to execute, and see a clear, large market opportunity. If you’ve got that, it’s time to start raising—and when you can raise money, you generally should.

For some founders, a good story and a strong reputation might be enough to attract funding. But for most, you’ll need a clear idea, a working product, and some early signs that customers are interested—what’s known as traction. The good news is that today’s tech tools allow you to build and launch a product quickly and cheaply, even if it’s hardware.

But just having a product isn’t enough. Investors want proof that your product fits the market and that it’s growing. So, when should you start looking for funding? When you’ve identified your market, know who your customer is, and have built a product that meets their needs and is gaining users quickly. A growth rate of about 10% per week for several weeks is the kind of traction that catches investors’ attention.

Your goal is to impress investors. If you can do that with just your pitch and team, that’s great. If not, keep working on your product and talking to users until you can.

when Product Team and Market align for seed funding round

4 Signs Your Startup is Ready For Seed Funding

1. Your Product Is Live and Gaining Momentum

When investors start taking meetings with you, it’s a sign of interest—but that’s just the beginning. At the seed stage, they’re looking for a fully operational product backed by solid evidence of market demand. You need more than just a working product; you need sales data that demonstrates product-market fit and growing user interest. A good benchmark? Aim for at least 10% week-over-week growth.

Sustained sales growth indicates your startup has long-term potential. With investors meeting countless founders each year, those who present clear, compelling sales metrics arae far more likely to stand out.

Before you dive into pitch prep, ensure your sales data is not only accurate but also up-to-date.

2. You’ve Developed a Robust Financial Plan

Securing seed funding is about establishing trust between you and seasoned investors. Venture capital firms and angel investors won’t commit to founders with half-baked plans. At this stage, investors are considering putting in anywhere from $500,000 to $2 million, so they need to see exactly where that money will go, backed by data-driven reasoning.

Your pitch should include essential financial documents like:

  • Balance sheet
  • Income statement
  • Financial projections
  • Cash flow statement

If your financial strategy is well-articulated and transparent, you’re ready to start pitching.

3. Your Operations Are (somewhat) Organized and Scalable

Early-stage startups typically operate with lean teams, but by the time you’re seeking seed funding, you should either have a slightly larger team or be poised for expansion. You’ve identified the key departments that need growth and can clearly show how additional roles will drive your company’s progress and align with its goals. Seed funding can provide the financial runway necessary to build out these critical positions.

4. Your Story Ends with a High-Growth Vision

Your business narrative is the thread that connects your initial concept, vision, and mission to your current growth trajectory. A compelling story not only conveys how your idea became a reality but also helps you build a personal connection with potential investors. As you prepare your pitch, make sure your narrative highlights how the core values of your company have fueled its growth and will continue to drive its future success.

Good and Bad Reasons to Raise Seed Funding:

Good Reasons to Raise Seed Funding

  1. Fueling Rapid Growth:
    • Ready to take your startup to the next level? Seed funding can turbocharge your growth by allowing you to bring on essential team members, scale up product development, and boost marketing efforts. It's the fuel you need to stay ahead of the competition.
  2. Proving Your Market Fit:
    • Securing seed funding isn’t just about the money—it’s about validation. When investors back your idea, it’s a strong signal that your business model and market potential are solid. This credibility can open doors to more investments and strategic partnerships down the road.
  3. Expanding Your Horizons:
    • Whether you’re eyeing new geographic markets or targeting a fresh customer segment, seed funding can help your startup get there. Use the funds to ramp up your marketing, adapt your product for new audiences, and establish a footprint in key areas.
  4. Attracting Rock Star Talent:
    • The right people can make or break your startup. Seed funding allows you to offer competitive salaries, benefits, and equity, helping you attract the top talent that can propel your startup to success.

➡️ Also interesting:

Product-Market Fit | Pitchdrive

Founder-Market Fit | Pitchdrive

Bad Reasons to Raise Seed Funding

  1. Bankrolling Your Lifestyle:
    • If you’re looking to raise funds to pad your personal bank account or upgrade your lifestyle, you’re on the wrong track. Investors are looking to grow a business, not finance your dreams of luxury.
  2. No Clear Game Plan:
    • Heading into fundraising without a solid plan on how to spend the money? That’s a recipe for disaster. Without clear milestones and a strategic vision, you risk burning through cash with little to show for it.
  3. Plugging Short-Term Cash Holes:
    • Raising seed money just to cover immediate bills or financial hiccups is a red flag. Without a long-term plan, this approach can lead to more problems down the line and strain your relationship with investors.
  4. Becoming Dependent on Investor Cash:
    • If your business plan relies solely on investor money with no focus on generating revenue, you’re setting yourself up for trouble. What if the next funding round doesn’t come through? Over-dependence on external funding can leave your startup vulnerable.
  5. Reacting Out of Fear:
    • Raising money just because you’re scared of the competition? Not a great move. Funding should be part of a thoughtful growth strategy, not a knee-jerk reaction. Otherwise, you might end up misallocating resources, which can do more harm than good.

bad reasons to get seed funding

Why Startups Fail to Get Seed Funding

1. Not Enough Proof of Problem-Solution Fit
Startups often fail to secure seed funding when they can't convincingly demonstrate that their product addresses a real market need. Investors are looking for evidence that you’ve identified a clear problem and that your solution effectively solves it. If a startup doesn’t have paying customers or strong market validation, it’s hard for investors to justify putting their money into a concept that hasn’t proven it can gain traction or generate revenue. Without this crucial fit, investors won’t feel confident in the potential for scale.

Read more: Problem Solution Fit for Startups: How to Achieve Success

2. Don’t Know How to Sell the Story Yet
Even with a solid product, startups often miss out on funding because they struggle to tell their story in a compelling way. Investors need to understand why your product matters, how it stands out in the market, and what makes your team capable of executing the vision. Startups that fail to clearly communicate their value proposition, business potential, and long-term vision often lose investor interest. A well-crafted narrative is crucial for inspiring confidence and getting investors excited about your company’s potential.

3. Weak Fundraising Skills
Many startups falter in the fundraising process simply because they don’t understand how to navigate it effectively. This can include setting unrealistic funding targets, approaching the wrong investors, or not building relationships with potential backers early enough. Investors expect founders to have a clear strategy for how much they need, why they need it, and how the funds will be used to drive growth. Startups that lack a well-defined fundraising plan or fail to connect with the right investors at the right time often struggle to close a seed round.

How to Approach Seed Funding

Seed round funding isn’t just about getting capital; it’s about creating a process that systematically attracts and secures the right investors. Just as you’ve developed a structured approach to your sales and marketing funnel, your fundraising efforts require a similar level of strategy and discipline.

At Pitchdrive, we see fundraising as a parallel to the traditional B2B sales and marketing funnel. Simplifying it, the process involves three core steps:

  1. Attracting and Adding Qualified Leads: In sales, this means filling your funnel with prospects who have the potential to become customers. In fundraising, it’s about identifying and engaging with investors who align with your “ideal investor persona.” This persona includes factors like sector focus, investment stage, geographic location, and check size.
  2. Nurturing and Moving Leads Through the Funnel: Just as in sales, where nurturing leads involves guiding them towards a purchase decision, in fundraising, it’s about keeping potential investors engaged. This means regular communication, staying top-of-mind, and using marketing tactics to maintain interest. Even if you’re not actively raising capital, consistently engaging with investors will pay off when you’re ready to close a round. A smart tactic here is to send potential investors a lite version of your quarterly updates, keeping them in the loop without overwhelming them.
  3. Converting and Retaining Investors: In sales, the end goal is to convert leads into customers and then into promoters of your brand. Similarly, in fundraising, once you’ve secured investors, maintaining and strengthening those relationships is crucial. Your current investors can be your strongest advocates, both as a source of additional capital and as a reference for new investors considering your business. Cultivate these relationships just as you would with key customers in a B2B environment.

To kick off your fundraising journey, it’s essential to clearly understand who the right investors are for your business. This involves knowing how your company fits into their broader investment strategy and how you can bring value to their portfolio. With this knowledge, you can systematically fill your funnel, nurture relationships, and ultimately secure the funding you need to grow.

Defining Your Ideal Investor Persona

Before you start hunting for investors, it's important to figure out who your ideal investor actually is. Think of it like knowing your target audience in sales—you need to understand who you're pitching to and why they’d be a good fit. This understanding helps you tailor your pitch and focus on investors who can offer more than just money, like valuable experience, connections, and guidance. Here are a few things to consider when shaping your “ideal investor persona”:

  1. Location: Where are you based, and does it make sense to have investors nearby? Or maybe you’re looking for connections in a particular region to help with expansion. Having investors in the right place can make a big difference.
  2. Industry Focus: You want investors who get what you do. If you’re a B2B SaaS company, for example, it’s probably a waste of time to pitch to investors who focus on marketplaces. Look for investors who are already involved in your industry—they’ll be more likely to understand and support your vision.
  3. Stage Focus: Make sure the size of your raise aligns with the kind of investors you’re targeting. If you’re raising a €1M seed round, giant firms that manage billions might not be the best fit. On the flip side, if you’re going for a big €30M round, you don’t want to approach a small firm. The stage they focus on should match what you’re aiming for.
  4. Current Portfolio: Check out who else they’ve invested in. If they’ve backed one of your competitors, they’re probably not going to back you too. Look for signs in their portfolio that they’re a good match for your business.
  5. Motivators: Think about what you want from your investors beyond just the money. Do they need to share your values and fit in with your company culture? Also, consider what they’re looking to get out of investing in you. This mutual fit can be the key to a great partnership.
  6. Deal Velocity: How quickly do you need to secure funding? Some investors move fast, like Kima Ventures, which might invest in 1-2 companies a week, while others, like Point Nine Capital, take things slower with about 10 deals a year. Matching their pace with your timeline is important.

Building Your Investor Shortlist

Once you’ve got a clear picture of your ideal investor persona, it’s time to start building a list of firms that fit the profile. Start by exploring tools like AngelList and Crunchbase to find potential matches. As you come across investors who seem like a good fit, add them to your list.

A simple Google Sheet is all you need to keep things organized—include the basics like the firm’s details, your point of contact, and any other relevant info. A good rule of thumb, suggested by Mark Suster, is to start with about 40 potential investors. Then, rank them into A, B, and C tiers—your “A” tier being your top picks and “C” tier being your backups.

By focusing on investors who align with your ideal profile, you’ll ensure that everyone on your list is a solid candidate, making your outreach more targeted and effective.

➡️ Also interesting:

Finding Founder-Investor Fit: A Key to Success

Pro Tips for Startups on How to Find Angel Investors

Angel Investors vs. Venture Capital: Key Differences Explained

investor shortlist

How to meet investors for Seed Funding 

Now that you've got a list of potential investors, it’s time to start making those connections. This part can seem a bit nerve-wracking, but with the right approach, you can engage investors and boost your chances of landing that seed funding.

Before reaching out to investors, make sure your startup is ready by reading our guide on how to prepare for seed round funding.

1. Making the First Move

Instead of cold emailing, a more effective approach is to leverage your network to find warm introductions. Start by looking into your first- and second-degree connections to see who might already know the investor or can introduce you to someone in their circle. A warm intro carries much more weight and shows that you’ve done your homework, increasing the chances of your pitch being taken seriously. Building relationships through trusted connections can significantly improve your odds of getting the investor’s attention.

making the first move

2. Getting Ready for Meetings

If the investor is interested, they might ask some questions or set up a meeting. This is where being prepared pays off. Before the meeting, make sure you have a solid pitch deck that clearly explains your business, the market opportunity, your progress so far, and your financial plans. Your pitch deck should be engaging and easy to follow—stick to the key points that tell your story well.

Also, have a simple business plan ready. While the pitch deck gives a broad overview, the business plan dives deeper into your strategy and how you plan to make things happen. Be ready to talk about your market, competition, how you’ll make money, and how you’ll grow.

During the meeting, focus on the parts of your business that are most likely to catch the investor’s interest. Use what you know about the investor to highlight the areas they care about most. Share stories or examples that bring your vision to life, and be prepared to answer their questions clearly and confidently.

3. Following Up and Staying Connected

After the meeting, send a quick thank-you email. This isn’t just about being polite—it’s a chance to keep the conversation going. In your follow-up, briefly mention how much you enjoyed the meeting and share any new updates about your company.

Example:

Over time, keep the connection alive by sending occasional updates—like a short monthly or quarterly email. Share big wins, product launches, new team members, or any other milestones. Even if the investor doesn’t commit right away, staying on their radar makes it more likely they’ll consider investing later on.

4. Networking and Expanding Your Reach

Don’t just rely on emails—get out there and meet investors in person, too. Attend industry events, pitch competitions, and startup meetups where investors often hang out. Join online communities like LinkedIn groups where you can show off your expertise and connect with potential investors.

If you know someone who knows the investor, ask for an introduction—a warm intro is often more effective than reaching out cold. And if you’re part of an incubator or accelerator, use their network to help you get meetings with investors.

Finally, remember that building relationships with investors takes time. Not every meeting will lead to immediate results, but stay patient and keep at it. Keep refining your approach, growing your network, and following up. With persistence, you’ll set yourself up to secure the seed funding you need to take your startup to the next level.

Negotiating Your Term Sheet

Once you've got the basics sorted out, it's time to dive into the exciting part—negotiating your term sheet!

A term sheet is essentially a summary of the key deal terms for your startup's funding round. It’s what you present to your investors to outline the main points of the deal. Think of it as the roadmap that guides the rest of the process. Although it’s not legally binding, it gives everyone a clear picture of what the final, legally binding documents—like the Shareholders Agreement and Articles of Association—will look like.

Using standard documents with consistent terms can help speed up the process. Investors know what to expect, and you can focus more on the bigger picture rather than getting bogged down in nitty-gritty details. A seed investment can often be closed fairly quickly when everyone is on the same page, so having a well-prepared term sheet is a big advantage. It shows your investors what they’re getting for their money and sets the stage for a smooth closing process.

Read more about term sheets:

👉 Ultimate Startup Term Sheets Guide: Key Insights and Must-Know Tips

Navigating the Legal Steps

Once you’ve sent out your term sheet and your investors are on board, it’s time to get those signatures. This part of the process is crucial—getting all your investors to agree and sign is what seals the deal. If any investors want to negotiate before signing, don’t hesitate to reach out to your Investment Expert for guidance. They’re there to help you navigate any requests and ensure everything runs smoothly.

1. Understanding the Legal Documents

After your term sheet is signed, the real work begins with the long-form legal documents. While the term sheet outlines the basic terms of the deal, these documents lock everything in legally. Here’s a breakdown of the key legal documents you’ll need to close your seed funding round:

  • Subscription and Shareholders Agreement (SSA): This is the backbone of your deal. It formalizes the relationship between your company, the investors, and any existing shareholders. It pulls together all the terms you agreed upon in the term sheet, advanced terms, and any disclosures. It’s a legally binding document that everyone—new investors, existing shareholders with voting rights, and an authorized company representative—needs to sign.
  • Articles of Association: Often called the “constitution” of your company, this document sets out the rules for how your company operates, including share transfers, director responsibilities, and issuing new shares. While no one needs to sign this document, it must be adopted by your shareholders and filed with Companies House, making it a public record.
  • Disclosure Letter (for Seed rounds only): This letter protects you by detailing any exceptions to the warranties (statements of fact) you’ve made in the SSA. For instance, if your cap table isn’t 100% accurate because of an advisor’s promised shares, you’ll disclose this here. It’s like a safety net that prevents any future legal claims from investors if something turns out to be different from what was initially represented.

2. Additional Steps for Seed Rounds

If you’re raising a seed round, there are a few extra steps to complete:

  • Previous Investor Consent: If you’ve had prior funding rounds with a Shareholders Agreement that requires consent from earlier investors to issue new shares, you’ll need to get their approval. This is done through an Investor Consent Notice, which needs to be signed by those who have consent rights under the previous agreement.
  • Preemption Notice: Existing shareholders have the right to maintain their ownership percentage in the company, which is known as preemption rights. You’ll need to send them a Preemption Notice, giving them the option to buy additional shares before bringing in new investors. If they choose to exercise this right, you’ll calculate the amount they need to invest to keep their shareholding steady.
  • Advanced Terms: In this section, you can outline more detailed terms like setting up a share option scheme or putting restrictions on founders to prevent them from joining competitors. You can stick with default terms for early-stage rounds, but be ready to adjust as needed during negotiations.

3. Getting Everything Signed

Once all these documents are prepared, it’s time to get them signed. Make sure everyone who needs to sign does so promptly. This includes new investors, existing shareholders with voting rights, and the company’s authorized representative.

By understanding and managing these steps, you’ll ensure a smooth closing process for your seed round. And remember, if anything feels unclear, your Investment Expert is always there to help.

Read more about: How to prepare for the seed round funding

signing the seed funding deal

Closing the deal 

Ready to close your round? Awesome! Here’s what to do next. The funds are in, and you’re almost ready to close your round. But before we can officially wrap things up, there are a few final steps you need to check off. Here’s what you need to make sure is done:

  1. Disclosure Letter Signed and Shared: Make sure you’ve gone through the Disclosure Letter, signed it, and shared it with all the investors involved in this round.
  2. Shareholders Agreement Fully Signed: Ensure that the Shareholders Agreement has been sent to all the new investors and that it’s fully signed.
  3. Articles of Association Shared: The Articles of Association should be shared with your investors, so they’re in the loop about your company’s rules and structure.
  4. Funds Tracker Updated: Fill in the funds tracker with the dates when the funds were received. This keeps everything organized and transparent.
  5. Board Resolution Created: The Board Resolution should be drafted and ready.
  6. Shareholders Resolution Signed: Make sure the Shareholders Resolution has been created and signed by shareholders holding at least 75% of the shares.
  7. SH01 Form Prepared: Finally, the SH01 form should be created, completing the process for issuing new shares.

Once these steps are complete, you’re all set to officially close your round!

closing the deal for seed funding

Wrapping Up

Fundraising is a crucial, yet often challenging, part of the startup journey. The goal is to get through it as quickly and efficiently as possible, so you can focus on what really matters—building your company. This guide is here to help you navigate your first venture financing round, making what seems like an impossible task a bit more manageable. Once you close that round, it might feel like you’ve just conquered a huge mountain. But as you catch your breath and look ahead, you’ll see that the real challenge is still ahead—growing and scaling your business. Now that the fundraising is behind you, it’s time to get back to work and turn your vision into reality.

A Brief Glossary of Key Terms

Go to Glossary for a more reliable source

  1. Seed Funding: The initial round of funding raised by a startup to turn an idea into a functioning company. This capital is used to develop the product, build a team, and start gaining market traction.
  2. Pre-Seed Funding: An earlier stage of funding, often sourced from personal savings, friends, and family, or bootstrapping. It’s used to transform a concept into a viable business before seeking seed funding.
  3. Term Sheet: A non-binding document outlining the key terms of a funding agreement. It provides a summary of the deal that will later be detailed in legally binding documents like the Shareholders Agreement and Articles of Association.
  4. Shareholders Agreement (SSA): A legally binding contract that defines the relationship between the company, its shareholders, and its investors. It includes all the agreed terms from the term sheet and ensures everyone is on the same page regarding their rights and obligations.
  5. Articles of Association: The "constitution" of the company, outlining the rules for how the business operates, including share transfers, director responsibilities, and issuing new shares. This document is filed with Companies House and becomes part of the public record.
  6. Disclosure Letter: A document that details exceptions to the warranties (statements of fact) made in the SSA. It protects the company by clarifying any inaccuracies or special conditions, preventing potential legal claims from investors.
  7. Preemption Rights: The right of existing shareholders to maintain their ownership percentage in the company by buying additional shares before new investors are brought in. This is typically exercised through a Preemption Notice.
  8. Investor Consent: Approval required from previous investors, as specified in earlier Shareholders Agreements, before issuing new shares. This is formalized through an Investor Consent Notice.
  9. Funds Tracker: A tool used to record and organize the dates when investment funds were received. Keeping this updated ensures transparency and organization during the closing process.
  10. Board Resolution: A formal decision made by the company’s board of directors, often necessary to authorize the issuance of new shares or other significant actions during the funding round.
  11. Shareholders Resolution: A document signed by shareholders, typically requiring a 75% majority, to approve major decisions such as the issuance of new shares.
  12. SH01 Form: A form filed with Companies House to officially document the issuance of new shares, marking the final step in closing the funding round.

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