To all these questions and more, the reply from many early-stage VCs is: It depends.
But for many founders, this answer is totally unhelpful.
Our goal in publishing this piece is to assist demystify what “it depends” on, so you may discover your strengths and weaknesses and determine if you’ve got “enough” traction.
We’ll start with a holistic review of milestones and Seed funding.
What’s a “Seed” round lately?
“Defining a ‘Seed’ investment is hard because each enterprise capital fund has barely different stage definitions,” says Underscore investor Brian Devaney. From Underscore’s perspective, a Pre-Seed round is probably going under $1M, while a Seed round may very well be between $1-4M.
But what matters greater than round labels is that you just’re in a position to raise the capital needed to get you to the following chapter of your startup journey.
“As an alternative of round labels, it could possibly be easier to take into consideration flavors of maturity,” says Underscore investor Sooah Cho.
- Founder with an idea + pitch deck
- Founder with an idea + pitch deck + MVP
- Founder with a pitch deck + vision + MVP + customers
- Founder with a pitch deck + vision + MVP + customers
A Few Notes on Pre-Seed Rounds
“There’s an enormous risk inflection point, no less than within the eyes of investors, going from pre-product and pre-revenue to having a product shipped and proof that individuals find it irresistible,” says Brian.
In case your startup is pre-product, think through the quantity of funds it could take to cross that inflection point, and consider raising a smaller Pre-Seed round to cover it. “Even when you can jump to raising a $2M-$3M Seed round, chances are you’ll be taking unnecessary dilution,” Brian adds.
How We Define Seed Funding Milestones
Typically, we expect of milestones when it comes to founding team, product development, market, and traction. They’re often framed as:
- What hypotheses do you’ve got about your online business?
- What’s going to it take for you to search out a solution and set you on a path to tackle your next milestone?
Even with the chaotic market dynamics of 2022, these milestones still hold true.
Founding Team: Do you’ve got founder-market fit?
Above all, potential early-stage investors are typically in search of exceptional people. “That’s why we start with founder-market fit: being uniquely qualified to tackle the issue you’re solving,” says Sooah.
This typically involves:
Lived experience: You understand the issue since you’ve experienced it first-hand. Having felt the pain, you realize why it matters, how necessary it’s, and what it is going to take to resolve it.
Unique market insight: You “know more about an industry than an investor does,” says Brian. And you may articulate a really nuanced and unique perspective on what it is going to take to resolve the issue.
Which means you’ve got detailed information on how the industry works, and you realize the space just like the back of your hand. That features:
- Who else is available in the market?
- Who’s done this before?
- Why has it worked or not worked previously?
- Why is your approach going to work now?
- What hypotheses are you testing and proving?
- What next steps will it is advisable to take to proceed learning?
For instance, while digging right into a recent investment opportunity, Brian emailed a founder a matter: “Hey, we’re interested to listen to how you concentrate on your positioning versus these other two firms.” This founder responded immediately.
“Within the period of time that it could have taken to easily write the e-mail, he shared a crisp, clear answer crammed with wealthy insights and deep thought,” says Brian. “He didn’t must do any research; the knowledge was already in his head.”
“This level of insight gives a founder an enormous advantage on the subject of navigating the market, relative to competitors and recent entrants who need to learn the market ‘from scratch’ as they construct.”
Problem obsession: You’re obsessive about the issue and genuinely enjoy working on it. “After I meet founders who’ve experienced the issue first-hand, they learn and execute with such urgency to resolve the pain point for others,” says Sooah. “Plus, you may tell they’ll genuinely have a blast working on it—and that gets them through even the hardest of times.”
Startup operating DNA: You may have the startup operating DNA needed to construct a enterprise scale tech company. “They will handle the anomaly of constructing all the things from scratch, test things, fail fast, and chart a path forward,” says Brian.
Beyond a person founder, Seed funding rounds typically have a more complete team across product and GTM. What makes them uniquely qualified to own their function of the business?
Product Development: Do you’ve got a product in customers’ hands?
“Ideally, you’ve built an MVP and have it within the hands of paying customers, demonstrating potential demand and willingness to pay,” says Sooah. Plus, you’ve got ideas for a way you’ll further capture customer dollars.
An excellent product can SLIP into the market:
- Simple to put in and use
- Low initial cost
- Immediate and ongoing value
- Plays well within the ecosystem
Market: Are you able to prove a large market opportunity?
Much of this comes all the way down to customer knowledge. You’ve talked to a whole bunch of potential customers, gathered countless customer notes and quotes, and may show why you’ve got such conviction in the chance. “When you can condense this information right into a pitch narrative before synthesizing the important thing insights in a pitch deck, that’s extremely powerful,” says Sooah.
How will you convincingly describe the chance? Try outlining it as a before and after story:
- Here’s how the work gets done today (via a distillation of all the client conversations you’ve had).
- Here’s how it could be done after the product is delivered.
- Here’s why it’s going to be so significantly better.
Investors will validate this story of their due diligence. “In an ideal world, the target market will express the identical challenge within the ‘before’ and have the identical positive response to the thought and its ‘after,’” says Brian.
“If I speak with someone who’s never heard of the product, they usually’re so enthusiastic about it that they need to be introduced to the founder, that’s an ideal sign,” says Brian.
Traction: Do you’ve got early signs of repeatability?
Ideally, you’ve got some early signs of organic traction. This might include customers pre-paying for the product or showing early signs of go-to-market efficiency.
Once you’ve got usage, proof of low churn, leading indicators, or early revenue traction, your Seed investment opportunity is more powerful.
What Modified for Seed Funding in 2022
To state it clearly: “Traction is one in all the largest differences,” says Brian. “On this current market, we’re in search of raving traction—not apathetic traction.”
But along with these benchmarks, many Seed investors also have a look at speed of each execution and learning.
Speed of Learning
On the Seed stage, you usually there is a big opportunity, but chances are you’ll not know exactly learn how to solve it. Proving that individuals will to your solution requires fast experimentation and learning to point out that you just are moving in the proper direction.
How do you show this? By sharing very specific and well-articulated hypotheses. After which in between each touch point with an investor, crisply articulate what worked or didn’t work—and why.
Speed of Execution
“Are you able to ship fast, construct a minimum viable product, and get it within the hands of users?” asks Brian. In any case, when you can do something in three months as a substitute of six, you’ve just saved three months of burn. This all results in capital efficiency.
“Capital efficiency is something that VC firms are going to search for in startups to navigate, survive, and even thrive on this market environment,” says Sooah. “It’s essential give you the chance to get farther with less resources given the fee of capital now.”
What This Means for You in 2023
So, given all the above… how much initial traction do it is advisable to raise a Seed funding round? Let’s consider just a few different scenarios.
Say a founder has worked at a large freight company, knows all the things about supply chain logistics, and has really unusual insights into the market—however it’s her first time constructing a startup. Throughout her fundraise, she’ll need to point out speed of learning and execution to prove she will get things moving from zero to 1.
Or say there’s an experienced startup founder with a previous strong exit, but he’s still learning a few market. He’ll must double down on deep proof points and testimonials from prospective customers to validate the issue.
Or there may very well be a young entrepreneur with limited work experience, but with an ideal idea and tons of ambition. Before raising Seed money, she’ll need to point out she will learn incredibly fast, has developed a “mastery of customer pain,” and that she has strong initial traction, says Brian.
Reflect on the above mentioned characteristics. The more you’ve got, the more flexible the traction bar could also be. The less you’ve got, the more leading indicators, user engagement, or revenue chances are you’ll must get your online business over the road. Where do you fall?