#70 — Best practices: How to raise seed money for your startup | Field Notes

Note: If you haven't already, consider reading our general playbook on raising capital first and then come back to this article.

The big picture: Seed funding is your startup's first real shot at turning an idea into a viable business—but navigating the funding landscape requires strategy, preparation, and knowing which investors to target.

Why it matters: The average seed round hit $2.5 million in 2024, with median valuations hitting $14.8 million. Getting this first funding right sets the trajectory for everything that follows.

Understanding the Seed Stage

What makes seed different: Seed funding serves a specific purpose—proving your concept works and finding product-market fit. You're typically selling around 18.8% of your company for $500,000 to $5 million, with most rounds falling between $2.5 million and $7 million. This stage sits between pre-seed (idea validation) and Series A (scaling proven concepts).

The validation imperative: Investors want evidence of real market demand before writing checks. Marc Andreessen defines the goal as achieving "product/market fit"—being "in a good market with a product that can satisfy that market". Without this validation, you're asking investors to bet on pure speculation.

Pre-Fundraising Foundation

Before you pitch anyone, nail these fundamentals:

Product readiness: Develop a working prototype or MVP that demonstrates your concept beyond the idea stage. Investors need something tangible to evaluate—not just a Google Slides presentation.

Team assembly: Build a diverse, capable team with complementary skills. Investors invest in people, not just ideas. Your team's track record and expertise directly impact funding decisions.

Financial modeling: Create detailed 12-month projections with specific, measurable milestones. Break down monthly costs including a 25% overhead charge for payroll taxes and benefits. Plan to raise 12 months of runway plus 50% extra for safety.

Legal preparation: Organize all business documents, ensure regulatory compliance, and prepare for rigorous due diligence. Corporate audits using 40-point checklists are becoming standard practice.

Market research: Conduct thorough analysis of your target audience, competitive landscape, and market size. Understand who will pay for your solution and how much they'll pay.

The Funding Landscape Deep Dive

Angel Investors

Best for: Early-stage startups needing mentorship alongside capital.

Typical investment: Personal networks, former entrepreneurs, affluent individuals willing to take early risks.

Advantages: Personalized attention, flexible terms, valuable networking, less formal processes.

Drawbacks: Limited funding capacity, potential strategic conflicts, may lack professional investor experience.

Approach strategy: Focus on relationship building over transactional interactions. Leverage their experience and network as collaborative partners, not just financiers.

Venture Capitalists

Best for: Startups with high growth potential and clear scaling paths.

Typical investment: Professional firms managing pooled investments, seeking significant returns.

Advantages: Access to substantial capital, scaling expertise, strong networks.

Drawbacks: Rigorous vetting, loss of control and equity, pressure for high growth.

Approach strategy: Demonstrate traction and market fit. Prepare for comprehensive due diligence covering financials, legal matters, and team backgrounds.

Crowdfunding

Best for: Consumer-focused startups with compelling stories or social angles.

Typical platforms: Equity-based (StartEngine, SeedInvest) or reward-based (Kickstarter, Indiegogo).

Advantages: Broad audience access, concept validation, typically non-dilutive.

Drawbacks: Time-intensive, uncertain outcomes, IP exposure risks.

Execution keys: Create compelling campaigns with engaging visuals and clear narratives. Set realistic goals and maintain continuous backer engagement.

Bootstrapping

Best for: Businesses requiring minimal initial capital where founders want full control.

Funding source: Personal finances, early revenue reinvestment.

Advantages: Complete control, no equity dilution, encourages lean operations.

Drawbacks: Limited resources, personal financial risk, slower scaling.

Success factors: Focus on cash flow management, gradual growth, and customer-centric approaches.

Grants

Sources: Government departments, corporations, foundations, trusts.

Advantages: Non-dilutive funding, credibility boost, project-specific support.

Drawbacks: Highly competitive, stringent criteria, lengthy application processes.

Application strategy: Align proposals with grant objectives, demonstrate innovation and impact, include detailed budgets and expected outcomes.

Fundraising Execution Playbook

Investor Identification and Outreach

Research methodology: Use angel investor directories, industry events, and your network to find investors whose interests align with your startup. Focus on those with histories of funding companies in your industry or stage.

Digital platforms: Leverage AngelList, SeedInvest, and similar platforms to reach investors actively seeking early-stage opportunities.

Relationship building: Attend pitch events, startup competitions, and networking events. Establish rapport early to foster trust and credibility before formal fundraising begins.

Essential elements: Your pitch deck should weave a compelling narrative emphasizing the problem you're solving, market opportunity, business model, team credentials, and financial projections.

Storytelling focus: Engage investors by connecting your vision, mission, and goals into a memorable narrative. Airbnb's 2009 seed pitch emphasized unique value proposition and scalability, helping secure $600K that enabled global expansion.

Continuous improvement: Refine your pitch based on feedback from mentors, advisors, and investors. Each interaction provides data for optimization.

Due Diligence Preparation

Document organization: Prepare comprehensive financial, legal, and operational records. Investors will scrutinize every aspect of your business.

Red flag mitigation: Identify and resolve potential issues like unclear IP ownership or inconsistent financial records.

Term sheet preparation: Draft preliminary funding terms including equity distribution, valuation, and investor rights to facilitate transparent negotiations.

Negotiation Mastery

Understand investor psychology: Investors assess risk versus reward—frame your arguments accordingly. They're seeking returns, not just supporting great ideas.

Know your worth: Come prepared with data-backed valuation arguments based on market trends, revenue potential, and competitive analysis.

Active listening: Good negotiation involves finding common ground, not pushing agendas. Respond thoughtfully to investor concerns and feedback.

Walk-away power: Your strongest position is the ability to decline terms that undervalue your company. Be firm about boundaries while remaining flexible within them.

Detail attention: Focus on more than headline figures—understand liquidation preferences, anti-dilution provisions, and board rights. Seek legal advice for complex terms.

Long-term perspective: Remember you're entering a potentially long-term partnership. Approach negotiations with respect and partnership mindset.

Funding Instrument Selection

SAFEs (Simple Agreements for Future Equity)

Best for: Startups wanting simple, fast funding without complex terms.

Characteristics: No interest rates or maturity dates, converts to equity in future rounds.

Considerations: Provides simplicity but less investor protection than other instruments.

Convertible Notes

Best for: Startups needing investor protection features while maintaining flexibility.

Characteristics: 2-8% interest rates, 18-24 month maturity, includes valuation caps and discount rates.

Considerations: More complex than SAFEs but offers additional investor safeguards.

Equity Financing

Best for: Startups ready for clear valuation and ownership structure.

Considerations: Requires more time, money, and legal work than other options.

Smart Capital Deployment

Strategic Spending Priorities

Product development focus: Allocate significant funds to refining your product and achieving market fit. This includes development, testing, and feedback mechanisms.

Talent investment: Your team is your most valuable asset—hire skilled individuals who share your vision. However, avoid premature hiring sprees that drain resources.

Marketing efficiency: Invest in cost-effective, targeted strategies with measurable ROI. Avoid random campaigns without clear objectives.

Operational infrastructure: Set up necessary business operations while avoiding lavish expenses like premium office space.

Financial Management Best Practices

Cash flow monitoring: Track spending closely and adjust as necessary to maintain financial health. Regular monitoring prevents resource depletion surprises.

Reserve maintenance: Keep a cash reserve for unexpected expenses or market downturns. This provides flexibility and security during challenging periods.

Milestone-based budgeting: Align spending with specific, measurable goals outlined in your business plan. Every dollar should contribute to achieving defined objectives.

Profit reinvestment: When generating revenue, reinvest significantly back into the business to fuel growth and reduce future funding needs.

Common Spending Pitfalls to Avoid

Revenue confusion: Don't treat funding as revenue—focus on generating sustainable income streams.

Feature creep: Resist adding unnecessary features; concentrate on core problem-solving capabilities.

Premature scaling: Avoid impulsive hiring or expansion decisions before proving market fit.

Investor neglect: Maintain regular communication with investors through progress updates and milestone reports.

Market Dynamics and Timing

Current landscape: Investors now expect pre-seed revenue traction, reflecting heightened risk aversion. The days of funding pure ideas are largely over.

Traction requirements: Investors seek "raving traction—not apathetic traction". Demonstrate user engagement, revenue growth, or strategic partnerships that prove market demand.

Competitive positioning: Understand how similar ideas have performed historically. VCs often pattern-match against previous investments in your space.

Pivot readiness: Be open to feedback and willing to adjust your approach. Small changes in initial state can yield dramatically different outcomes.

Post-Funding Success Factors

Milestone achievement: Focus on reaching the specific goals that justified your funding request. Investors expect progress against stated objectives.

Investor relations: Maintain open communication with regular updates on progress, challenges, and achievements. Strong relationships facilitate future funding rounds.

Growth metrics: Track and optimize key performance indicators that demonstrate progress toward Series A readiness.

Team scaling: Hire strategically to support growth while maintaining culture and efficiency. Each new hire should directly contribute to core business objectives.

The bottom line: Seed funding isn't just about raising money—it's about finding the right partners who believe in your vision and can help you scale. Success requires thorough preparation, strategic investor targeting, smart capital deployment, and relentless focus on achieving product-market fit. Master these fundamentals, and you'll be positioned to not just raise seed funding, but to use it effectively to reach Series A and beyond.

#70 — Best practices: How to raise seed money for your startup