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When to approach Angel/Seed firms?

I’m finding conflicting information about how early is too early to start conversations or apply to Angels and Seed firms. It seems (recently) that all you need is a strong idea, strong team, and some provable market/revenue assumptions and if you’re on the west coast you can raise $500K at a $3M-5M valuation. I’ve even read on certain VC sites that “it’s never too early to contact us”. But I think in reality if you don’t have customers, revenue, or are on the west coast then you’re out of luck.

The problem is we’re on the east coast. We have a working prototype, marketing plan, a mailing list of interested beta users and a patent application in progress. The problem is we’re a software solution that requires a piece hardware that isn’t fully in the market yet (the OEM’s are shipping later this year). Additionally, our offering is software with a service backend that requires a chunk of capital to get off the ground. I’m hearing from my east coast advisers that we need to prove market fit with customers, but we can’t get customers without both of the above (cash to gets operations started, and hardware saturation).

Now, we can solve the hardware problem by OEM’ing the hardware ourselves. We have the design and a factory, we’d just need to pull the trigger. But that’s a waste of time if we can’t turn operations on first, which is why we need a cash infusion.

So what are our realistic options here? Engage only with west coast investors who may be more willing to take a chance on a solid pre-rev company? Or do I heed my advisers who say we need to (somehow) find a way to get paying customers, which is practically impossible without a sizable investment because we need to fund operations.

I’m thinking about Kickstarter because that would do several things for us: 1) prove there’s a market, and 2) give us a lump sum of cash needed to turn operations on. What are your thoughts and advice? Can you recommend an Angel/Seed firm that may want to talk to us even though we’re pre-rev? Thank you very much in advance!

  • Since you mention kickstarter I’m guessing you’re building some sort of consumer device with a web backend. Internet-of-things gadget, maybe. If you’re going for the consumer space you won’t have high profit margins, which means you need high sales volume. This in turn means you need to ramp up manufacturing quickly so you’re going to need VC money soon. It doesn’t sound like you’ll get cash flow positive with just some seed funding.

    So if you get seed funding at this early stage — before you even have customer validation — then you’re stuck in a narrow execution window. You’ll have to get to product-market fit very quickly, otherwise every VC is going to conclude that your startup isn’t going anywhere and pass on you.

    If you decide to raise seed funding now then raise as much as you possibly can, because you won’t have an easier time raising money 6 months down the road (unless your product goes viral).

    You’re in a tough spot. Try to get some media buzz going based on some early prototypes and concept art if possible. Anything that shows you’ve got something with potential.

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  • If you don’t have a leadership team with exits and/or Google/Apple/Microsoft executive pedigrees, it is a complete waste of time to go looking for VC support.

    Angel support is possible, but you’ll have to have serious chops in terms of finding non-grouped angels (many are now consolidated into investment groups, which is to say they’re only somewhat slower to move/conservative than VCs).

    Raising funding is a serious skill which requires pretty much professional help unless you’re in the categories noted above. Not saying it can’t be done, but I am saying that it is far from easy and likelihood of success is poor.

    On the kickstarter side – it ain’t a magic wand either. If you only need to raise a relatively small amount – say $100K or less – it can be done, but that amount generally means you get very little free capital out of it as much of the ‘earn’ is taken by fees and promised products to supporters. Even then, you will have to have a significant amount of investment in order to get your message out – again, assuming you aren’t one of those people with tens of thousands of followers. We’re talking 5 digit marketing budgets if you want any prayer of really hitting it out.

    What you’re going to need to look at is the amount of capital needed. For $500K and above, that’s of a size that VCs would be interested in. Angels can contribute $25K to $250K if they believe, but it ain’t easy finding ones that do. Kickstarter – the numbers of projects that raise over $200K isn’t super high – you should know by now what the landscape looks like. All of the above are going to require investment: travel, wine+dine for VCs and angels, marketing for kickstarter.

    On a general note: dependence on an OEM product seems to be a serious bottleneck. I’d expect tons of questions there including: what happens if the product fails? What’s the possibility of OEMs competing against your product with an OEM addon to their hardware?

    Good luck.

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