Risk and funding

VentureBeat has a guest piece from Opus Capital’s Carl Showalter on advantages of seed funding at the early stages of a company.

Many startups go out and raise as much as they can get in the first round of financing. This is often before the company has a product, any customers, or even a fully-built team.

An entrepreneur’s risk spans three areas: team, technology and market. They can determine how much funding they need by asking themselves one question: Can a small amount of money dramatically reduce one or more of these risks in six months?

By securing only as much capital as they initially need in a form of a seed round, entrepreneurs do themselves a big favor.

An investor will value your company and his investment based on how much risk he’s taking. A company with little more than an idea is a huge risk. What if they can’t pull off the technology? What if the team fractures when they hit hard times? What if nobody wants the product?

The more you can reduce those risks for the investors, the better your terms will be for your series A. Come out of the gate with a product that a few customers are actually paying for and investors will find you a lot more attractive.

Seed investors have a different investment goal than a VC. Because of the lower amounts of money being invested, a seed investor can invest in more companies. The companies’ needs are smaller on both the capital and the attention side, making it possible for a seed investor to spread their money and attention across more entrepreneurs. In doing so, they’re also spreading that risk out more. It’s okay if a few investments don’t pan out, because others will.

Investors providing seed capital will offer much better terms to an unproven startup. Until you’ve proven yourself, don’t go out trying to raise millions of dollars.