How to Raise a Seed Round: The Investor List, the Meetings and the Close

On 5 November 1858 in Paris, Ferdinand de Lesseps opened a public share sale for the company that would dig the Suez Canal. Four hundred thousand shares went on offer at 500 francs each, and the sale was due to close on 30 November.

French savers bought about half of them, around nine shares each on average according to Wikipedia's entry on the company. Not a single one of the shares set aside for Britain, Russia, Austria or the United States was sold. The British government had opposed the project from the start, and Lord Palmerston was among the canal's most stubborn opponents.

When the company fell short of the capital it needed to exist as a legal entity, the Viceroy of Egypt, Said Pasha, took up the unsold shares. The Compagnie universelle du canal maritime de Suez was formed on 15 December 1858, and the canal opened on 17 November 1869.

The second half of the story is less well known. Said's successor, Ismail Pasha, fell deep into debt, and in 1875 he sold Egypt's 44% stake for four million pounds. The buyer was the British government; seventeen years earlier, none of the shares reserved for Britain had been sold. The investor who completed the round ended up handing his stake to the side that had turned its back at the start.

A seed round is a sales process

The first outside capital a startup raises is called its seed round. Geoff Ralston, a former president of Y Combinator, walks through the process in a guide published on 7 January 2016 that now sits in the YC Startup Library. Its central idea is simple: a seed round is not a moment of inspiration but a sales process with a timetable, a list and a close.

When: evidence first

The right time, Ralston says, is when you understand the market and the customer and your product is being adopted at an interestingly fast rate. How fast? Growth of 10% a week for several weeks running is impressive, in his view. How to measure it is covered in What Is a Weekly Growth Rate?

How much: enough to reach the next milestone

The ideal amount takes you to profitability, or to your next fundable milestone, usually 12 to 18 months away. In his 2016 guide Ralston offers a simple sum: in Silicon Valley an engineer costs a company about USD 15,000 a month all in, so five engineers for 18 months come to about USD 1.35 million.

The stake you give up is part of the calculation too. Most seed rounds, Ralston writes, require dilution of up to 20%, and you should try to avoid going above 25%. You can follow how your share shrinks step by step in What Is Equity Dilution?

The investor list: start wide, rank by likelihood

Ralston passes on Paul Graham's rule: when raising money, be "greedy". Talk to as many investors as you can, but put first the ones most likely to commit money soonest. Rank the list by expected value, and do not spend most of your time on the longest shots.

The best way to reach an investor is a warm introduction from someone you know. Angels invest their own money and usually decide alone, often quickly. Venture capitalists invest other people's money; they want more meetings and decide together with their partners. London was on Lesseps's list too. Waiting for money that will not come means delaying the money that will.

The meeting schedule: leave every meeting with a next step

The aim of a first meeting, Ralston says, is not to close the round but to get the second meeting. Investors seldom say yes on the day they first hear a pitch, so book plenty of meetings close together.

• Before the meeting, research what the investor likes to back.
• Strip the pitch down to the essentials: why the product is great and why your team is exactly the right one to build it. For the structure of the pitch, see How to Make a Pitch Deck.
• Listen. If the investor talks more than you do, Ralston writes, the odds of a deal shoot up.
• Leave with either an attempted close or a clear next step; do not leave anything ambiguous.
• Stay organised: co-founders should split the work, and every conversation should be tracked on a list.

Closing the round: the first yes is the hardest

The line from the guide that sticks is this: the hardest part is getting the first money into the company. Once the first money is in, each subsequent close gets faster and easier. And when someone says they are in, do not wait; get the documents signed and the money in the bank.

Ralston recommends working with standard documents. With papers such as YC's SAFE, negotiation usually comes down to one or two variables: the valuation cap and, if there is one, a discount. Do not negotiate in real time at the table; take the request away, talk to your adviser, then come back.

You also need to learn to recognise a no. Ralston passes on one of Graham's images: if the drink is finished, stop making that awful noise with the straw. But do not give up too early just because it is hard; keep the round alive. And look at who the money comes with: the round Said Pasha completed changed hands through debt seventeen years later.

Why does the first yes matter so much?

In 1992 the economists Sushil Bikhchandani, David Hirshleifer and Ivo Welch gave this a name in the Journal of Political Economy: an information cascade. When people decide one after another, they see the choices made before them and sometimes set their own information aside to follow. Cascades are fragile; new information can reverse them. In a seed round, the first investor's yes is a signal to the others, and so is a widespread no.

Then there is the word itself. The English "venture" is a clipping of "adventure", which goes back through Old French aventure to the Latin adveniō, "to arrive". At its root lies "what is about to come". That is exactly what a seed investor buys: something that has not arrived yet.

The tide and the voyage

In the fourth act of Shakespeare's Julius Caesar, Brutus says:

"There is a tide in the affairs of men, / Which, taken at the flood, leads on to fortune; / Omitted, all the voyage of their life / Is bound in shallows and in miseries. / On such a full sea are we now afloat, / And we must take the current when it serves, / Or lose our ventures."

The last word is no accident: whoever misses the current loses the venture.

When will the tide come in on your round: when the first yes arrives, or when you have gathered the evidence that will bring it?

To prepare your pitch before the round, How to Make a Pitch Deck is worth a read.