Whether your startup skips an accelerator or joins one or more, the real milestone investment is in the seed round.
But in a fast-moving high paced startup world, the clear line between the seed round and a Series A round has blurred. We may have heard about a large VC that invested around RM100,000 just to get an option (so to speak) to invest in the next round (during a series A).
The first round in the past tends to be called the seed round led by angel investors that came together to invest anywhere between RM50,000 to RM1,000,000. But let’s see how things have changed in the past compared to the current trends.
What is the seed round?
In Malaysia particularly we are seeing more accelerators like 1337 Ventures Alpha Startups Digital Accelerator (ASDA) to NEXEA to ScaleUp Malaysia’s Accelerator also investing real cash in exchange for equity in the finalists for every startup cohort hosted by the organiser.
For example, the 1337’s ASDA programme comes with a potential equity investment of up to RM50,000 (usually 1337 as a venture capital may invest together with a co-investor like a strategic partner or even an angel that has industry knowledge in the startup business) while NEXEA and ScaleUp Malaysia’s investee companies may get up to RM250,000 investment at a specific agreed equity interest. So these are examples of how a startup tends to kick off its seed round.
How is a seed round different from a series A round?
First, I don’t recommend using a quantum or total funding raised as the benchmark or metric to measure if a round is a series A round or otherwise as the amount can be so wide and hard to come up with a consensus on the actual range.
Instead of using an amount to measure a series A round and unlike a seed round that usually consists of angels, families and friends, a Series A can be defined as a funding round when you start getting institutional or a financial investor’s money like a VC or a corporate (that comes with substantial sums of cash).
Unlike an angel that may even transfer the investment capital into your startup after a short meeting, a series A investment’s terms are more onerous.
The steps involved from the moment you get a term sheet to the moment you’ll see the cash in your startup’s bank account are arduous. There will be extensive back and forth negotiating on the term sheet and transaction documents together with a concurrent due diligence exercise that takes place in between all these activities. The usual fundraising period for a series A round can take between three to six months.
In recent years, we’re also seeing more corporates that have also decided to move into the seed round. Why the sudden interest? If a corporate get in early in a startup, these investors also get updates on how the startup is doing including the fit of the founding team in motion. This gives an insider perspective on the startup’s potential for a potential Series A investment in the future. So consequently in the past several years, we’re seeing the upper bracket of the seed round has also moved into the USD5 mil to USD8 mil range.
When should the seed round take place for my startup?
As a founder, you may wish there is a unique calendar that looks something like this: “We’ll do our seed round within 3 to 6 months once we’ve formed our company. We then will do our Series A round within 12 to 24 months after our seed round. We’ll then look at exiting our startups within the next 36 to 48 months.”
That sounds like a fantastic plan. But as a founder, you need to be realistic about the startup journey. You should do a seed round when you think you have good terms, whenever that can be, not just to meet some arbitrary calendar or timeline.
In my work as a startup lawyer, when a startup comes to me with a detailed plan for fundraising but they have no current customer leads or even worse a working product, it is hard to take the founder seriously. Generally, a round should happen before you run out of money and have to shut down the startup. Therefore, if you spend all your time cold calling VCs and pitching to investors rather than building a great product or even networking with investors, you are most likely never going to close a funding round.