EC A Simple Way To Reduce Seed-Stage Risk

The allure of early investing comes from seeing the companies you invest in reach valuations of hundreds of millions of dollars and/or eventually go public.

But seed-stage investors have more immediate concerns.

It’s so obvious that I think many early investors lose sight of its importance. It’s simply this: Seeing your startup get to the next fundraising round.

Or put another way: NOT seeing your startup run out of money.

Three Questions You Need to Answer

Is your startup putting itself in the best position to reach a Series A round of fundraising in the next 12 to 18 months? Some questions you need good answers to…

Are projected expenditures in line with a startup’s deck? For example, if you’ve been told that the company’s product is finished and ready for rollout, but that the bulk of your money is being used for development, something is wrong.

Is the company raising enough? This has two components. Are projected costs realistic? And how long are the funds expected to last? (If it’s 15 months or less, you may want to suggest an 18-month runway to the next round. Money is getting tight.)

Is its use of funds consistent with your comfort zone? For example, some investors wouldn’t mind if their seed money is used to hire a “Digital Prophet” or “Fashion Evangelist” (real job titles at Silicon Valley companies!). Some (like me) would.

David Shing: AOL’s Digital Prophet

The good news: There’s a shortcut to understanding how the next 12 to 18 months could play out.

A Good Starting Point

You can find the information you need under a category known as “use of funds” or “use of proceeds.”

Sometimes a company will show you what percentage of funds will be used by category. Here’s an example from one of our Startup Investor portfolio companies, MST.

R&D: 40%

G&A: 11%

Regulatory: 16%

Sales & Marketing: 33%