Only 8% of venture capital (VC) funding is received by female entrepreneurs. Only 1% of VC funding is received by African-Americans. The reasons for this grave disparity in funding opportunities between White and Asian male founders and women and underrepresented people of color have been well documented. Recognizing this is a problem worth solving, increasingly more programs and initiatives are launching efforts focused on bringing more women and people of color into the tech field – either as members of existing companies or founders of their own.
The Kapor Center is one of the most active organizations in this movement to diversify tech, and here at Kapor Capital, the VC arm of Kapor Center, our mission is to invest in companies that are closing gaps of access and opportunity for underserved communities, or involve disruptive democratization of a sector. Currently, 46% of our current portfolio companies are led by women and/or people of color. Although impressive by diversity metrics, we recognize that we’re still very much an anomaly in the VC world, and that significantly more work still needs to be done in order to make these numbers the norm. This is why we’re excited and inspired by the lead several other organizations are taking to diversify tech. Although very much in its infancy, we are seeing significant shifts in mindsets and practices that result in a new generation of skilled, knowledgeable, and networked tech entrepreneurs.
Last week, I came into contact with a subset of this new generation of tech entrepreneurs: hundreds of African-American and Latino female tech entrepreneurs at FOCUS100. Dubbed “the most diverse tech conference on the planet,” more than 80% of their speakers were women and/or people of color. Recognizing that 1) fundraising is a challenging endeavor – irrespective of gender or race, and 2) data continues to prove that the odds are highly skewed in favor of White and Asian males, I decided to use this opportunity to share my five biggest pieces of advice for what all tech founders can do today in order to secure a seed round of funding. The list is not all-inclusive, but it should serve as a baseline to gauge when your company is ready to pitch an investor.
5 Steps to Raising a Seed Round ($500K- $1.5M)
1. Technical Co-Founder
The lack of a technical cofounder (e.g. CTO) is one of the most common reasons investors pass on tech companies. Just as you wouldn’t start a restaurant without a head chef, when it comes to determining the starting lineup for your tech startup, a technical cofounder is a must. But fair warning – this won’t necessarily be easy. Finding a CTO can be like trying to find a needle in a haystack, as there’s often times a shortage of technical talent. The reality is, you and/or your current teammates may need to develop technical skills until you find the right person. Fortunately, today there are more resources and programs than ever to help you get started.
2. Minimum Viable Product
As a new entrepreneur, there are plenty buzzwords and “lean startup lingo” you’ll surely be exposed to, and one you’re going to want to acquaint yourself with right away is minimal viable product (MVP). The concept of an MVP has been covered many of times in detail on Quora, so I’ll keep it short. A MVP means you have a product in market built to the point where a customer can use it and find value from it. If you’re going to raise a seed round, you’ll need to have something built before you fundraise. If your team cannot deliver an MVP today, then your top priority is to add someone on the team who can build the software or the app.
3. Traction
Just a decade ago, entrepreneurs were able to raise a seed round with just a pitch deck. Those days are gone. The new baseline requirements include having the team and an early product in place prior to raising the seed round. Today, you will also need traction to prove your concept provides value. When increasingly more people in your target audience are actively engaging with your product, your product is “gaining traction,” and its value is being affirmed. Andrew Chen has also written extensively on this topic.
4. The Right Fit
Every week, we receive pitch decks from companies that do not fit our investment thesis:
- Closing gaps in access to resources and opportunities for underserved communities. Some sectors of interest include EdTech and FinTech.
- Disruptive democratization of entire sectors in ways that are massively cost reducing and will streamline inefficient processes. This often involves the disruption of entrenched industries that have often underutilized information technology, like urban planning, logistics, agriculture, or transportation.
When you’re trying to sell your product to new customers, it’s imperative that you first do your homework on who they are and what exactly they want, to ensure that your product actually meets their needs. The same goes for investors. Before pitching your product, you should know who the investors at the firm are and what they care about. When you don’t show that you understand their mission and how your product and/or team fits into it, you make it easy for investors to pass on you.
5. The Right Target Amount to Raise
Finally, it is very important to understand the amount of investments that seed stage firms typically make. You want to avoid being “too early” or “too late” when raising your seed round. Companies raising under $500K are generally too early for seed stage firms and would have better success with angel investors. AngelList is a great resource to find active Angels focused in your industry. Companies who are raising over $2M are generally too late for seed stage firms. These companies have most likely raised a seed round and would be a better fit for Series A firms. The sweet spot for seed stage firms is $500K – $1.5M.