Following the first Angel investment, it is time to pass the hat again. Now you are ready for the seed fund investors. This is the first set of financing rounds and it is fiercely challenging. You cannot expect to be structuring the deal or managing the downsides. The seed investor knows that if things go bad they will be left with IKEA furniture and a few computers—that’s it. Zip! Even patents for proprietary technology are worth very little. If seed investors have forty pages of downsize structure in the term sheet, they know they have the wrong deal. Rather focus on the growth of the business and the opportunities. 

In Canada, about 10%-15% of total venture capital goes into seed start-ups— which is not too bad when compared to the U.S.

Remember, VCs have seen hundreds of entrepreneurs and categorize them into the following:

University spin-offs: Perhaps you won the business plan award for best new business idea. Now you want to make it happen in the real world. Your issues will be a green management team and little market validation of your idea.

1st Timers:  These are the guys laid off from Nortel. Typically, they are engineers or product experts and lack working with a Board of Directors and may find that a challenge.

2nd Timers: These entrepreneurs have done the first round of getting funded and are back for a top-up and refuel. They are less work than the fresher categories. Investors will take a harder look at this stage because business is a tough deal, just like Hollywood, yesterday’s heroes are not necessarily today’s stars. 

Quick Test

How ready are you to go for a higher level of funding and ask for $2 million and up? See the checklist below, and use it to make sure you are ready for the Venture Capital stage of investors.

Since the dot com bubble, Venture Capitalists are understandably grumpy and they write tough term sheets, probably wanting 40% ownership. (You can earn back shares.) They want to see that the company has traction with customers. They wonder “will this company run out of time and money before they reach their breakeven point?” In the Canadian finance industry, the dot com bubble burst and the American tourists limped home. When foreigners come in they go back to the U.S. early. Realistically, there are fewer people to talk to and fewer people to make investment decisions.

Valuations are more important at a later stage. But why choose a seed company when an investor can get money for a company validated by the market? The Venture Capitalist is attracted to funding your business as there is the strong possibility, if you pass all their due diligence, that your company will give far higher growth than the more mature companies. 

Put your self in the VC’s shoes and how he or she needs to be reassured that your will make them look good to their investors.