Our seed round became public recently and a couple weeks ago, there were several articles discussing the difficulty of raising a seed round in the last couple of years, so I thought I’d share the process we went through.
You Need Proof Points And Your Earliest Supporters Are Always Key To Raising A Seed
First off, we could not have raised a seed round without our earliest users, our friends, and our families supporting us. The process of getting to the seed round is wrought with uncertainty, testing, and anxiety (nothing has changed since raising the round). We spent 6 months building the first version of Parsec, just wondering if anyone would be interested in what we were creating. We then pushed publish on an article explaining our technology, a Hackernews post, and a Product Hunt announcement. Fortunately, about 500 people showed up from those posts, signed up, and tried our software in the first couple of days. We owe those early adopters and our friends a lot for sharing and giving us feedback, especially because the product was an absolute mess then. They also posted a lot of positive feedback on Reddit and other social media channels, which our investors actually read before investing.
Despite the state of the product on the first day and during the months of early iteration, we were improving it, and we felt there was a big market for game streaming software that gave you access to a gaming PC from anywhere.
A Word Of Caution — Before Raising, Make Sure You Understand The Incentives
When you raise a seed round, you’re committing yourself to a business model dependent on a huge market and an eventual exit. Every seed round is like buying a deeply out-of-the-money call option for the investor. It’s either spectacularly valuable, or it’s worthless. Your investors want the business to take on more risk and aim for the largest opportunity possible because that’s the incentives in their business model. Meanwhile, at the seed stage at least, you can build a successful business and exit at $30mm and have a very successful outcome for your team and you. For an investor, however, this outcome isn’t exciting because they need you to help return the whole fund because seed investing is extremely skewed toward a small number of winners. They need every investment to act like a big winner until it isn’t.
Get Started Before You Start Raising
Our seed round began a long time ago when Chris and I met in my last couple years of college through his girlfriend (now wife). Being friends for a decade helped us a lot. Investors like it when two people who are co-founding a company have known each other for a long time. It eliminates one of the biggest risks in seed funding — the company falling apart because founders can’t get along when things inevitably don’t go well for awhile.
Additionally, prior to starting Parsec, I spent several years getting to know investors in NYC. It’s much easier to get an investor to say yes, if she knows you from informal events beforehand. This is another big risk that you can eliminate with careful preparation. Don’t forget, from the investors perspective, it’s all about limiting their risk where they can, so if you can find ways to do that, like meeting investors informally well in advance, do it. I went to events and got introductions to many of the seed investment funds years before Chris and I founded Parsec. Prior to Parsec, I also spent three years at a successful technology startup in NYC, NewsCred. One reason I chose to work there was that many investors in NYC told me great things about the CEO. My relationship with the co-founders, Shafqat and Asif, was tremendously valuable in getting to the seed round. Shafqat and Asif both vouched for me and made introductions to investors that were invaluable. In fact, Shafqat made the initial introduction to the fund that led our seed round — Lerer Hippeau Ventures. And as a product leader at NewsCred, I attended several board meetings, which opened the door to those firms during the seed round. It also exposed me to mentors, like Brad Gillespie, whose firm was never really a fit for Parsec, but provided tons of early feedback to help us.
Getting In The Door — Meetings
A caveat — we are well aware of the biases in technology fundraising. My co-founder and I look like technology founders. We’d be remiss in not admitting that it helps. Now, I don’t think that the bias will get you beyond the very first five second impression, but it does help you and the first five seconds are extremely important.
I believe Parsec benefited from looking a bit different from most companies in NYC. We are building low latency video streaming technology. There are very few companies in NYC doing something like that. It helps to stand out from the other 20 companies an investor may meet during that week because she won’t talk about you with her partners until the next weekly investment committee meetings, and you need her to remember you.
We started fundraising months before our MVP launch when we started introducing Parsec to the NYC investor community. One of our earliest meetings was with Notation Capital. We were introduced to Alex Lines and kept the communication going for about 6 months before he gave us a term sheet. Notation focuses on the type of company we were at the time, extremely early stage. It’s a hard business to be in, and we’re grateful for all the time Alex spent with us very early in the process, even before there was any reason to believe in us.
We started taking meetings in earnest only after one fund told us that we were ready to raise a seed round. We weren’t planning on it then, and we weren’t kicking off a formal process, but his interest jump-started everything. Although this fund didn’t invest in us, the partner (who shall go unnamed, but I hope he reads this) was extremely helpful. He guided us through the process at his firm, introduced us to several investors, encouraged us to fundraise, and his initial interest in Parsec made other funds feel comfortable with us.
After an introduction via Shafqat and some healthy competition and intra-fund communication between the aforementioned fund, LHV, and NextView Ventures, we were on our way to a funding round. Remember, they all talk. I was amazed how things I told one investor invariably were brought up at a meeting with another fund. Don’t underestimate how much they talk. Many investors have weekly meetings with each other to talk about companies they’re seeing.
Have A Conversation — Don’t Be Boring And Read A Deck
During our entire fundraising process, we actually never gave a formal seed presentation. Informal conversations are much more active for the investor and you. Your passion for the business will be so much clearer in a conversation than reading/memorizing a presentation. We always brought the presentation, but we kept the conversation informal — this probably works for seed rounds, but I’m guessing this informal approach won’t work at the next round. The only time we were forced to give a big formal presentation, it ended with a big rejection.
Raising The Round
Despite all of what was said above and partially because we approached the funding process informally, we were stuck in between raising and not raising. For a couple weeks, we were trying to figure out what to do to get the few funds that we were talking to excited enough to deliver a term sheet.
For a brief moment, we thought about reaching out to tons of investors in NYC to try to get them to create some competition for the investment. We tested it on a few, and we realized it wasn’t our style and probably wouldn’t work. It was just a gimmick to get our preferred funds (NextView Ventures, Notation Capital, Lerer Hippeau, and the unmentioned fund) over the line.
Instead, we took advantage of the one thing we could control, which was our timing. Thinking back to the incentives I mentioned above, you also need to realize that seed investors only have ONE chance to invest in you. You need to make them feel like they will miss out on this one chance. We set a deadline for 3 weeks, and mentally prepared ourselves to continue building Parsec without raising from an institutional investor. We lined up some angel money to carry us if we needed it. With that deadline in place, a couple term sheets arrived just in time.
Chris and I were in LA when we received the term sheets. We were in between meetings, taking calls, and negotiating the term sheets to make sure the investors were all aligned. One thing that we did, but probably wasn’t in our best interest from a negotiating standpoint, was that we told each fund about the other term sheets. We know this hurt us a bit on valuation because we could have played the term sheets off each other a bit, but we decided to just make the process transparent and easy for everyone. Lerer Hippeau and Notation Capital combined their term sheets, and we were ready to close the round with one more commitment from another fund.
We had to meet with two more funds to close out the full round, so we flew back to NYC on a Sunday, went to an investor meeting in NYC Monday morning and one in Boston on Tuesday. NextView filled out the round with a commitment that Tuesday. Somehow, Chris and I raised a successful seed round, which was awesome, but then we started to think, uh oh. Now, we have to do the difficult thing, build a venture scalable business ¯_(ツ)_/¯.
Funding rounds from the outside sometimes come off as glorious moments of achievement. To be clear, it’s really hard to get to this point, but it’s far more difficult to build a company. Funding is a step along a much longer journey to realize the vision of a company. We are incredibly grateful for the support of our investors (including a strategic who we can’t talk about, but one day we can share that story), but it’s far more important to focus on the wins in traction, product-market fit, and building a growing company.
- Most importantly, thank you to all of the gamers who have tested Parsec and been through the ringer with us and our product. There’s a lot more to improve, but we’re striving to constantly get better. Thank you so much.
- Taylor Greene and Julian Moncada at Lerer Hippeau for leading our seed round and making the introduction to NextView.
- Tim Devane and David Beisel at NextView Ventures who committed to Parsec and enthusiastically supported us and believed in our vision for changing how the world accesses computers.
- Alex Lines, you’re awesome. Thank you for being an early sounding board for the company before anyone else was listening or paying attention to us.
- To an unnamed VC at our strategic investor and the key employees there. Thank you for ushering us through every process at your company. You’ve jumped through hoops to help us. We look forward to revealing who you are in and the partnership the future.
- To our lawyer, Solomon Eskinazi. You have a tough job, but it helps me a lot to know that you’ve got our backs and protecting us.
- Shafqat and Asif, thank you for introducing us to LHV and being great mentors to Chris and me.
- Family and friends, you’re our best cheerleaders. We couldn’t have gotten to this point without your patience, love, upvotes, and Facebook shares :).
- To the founding team Parsec. We’ve been through many ups and downs together and there will be plenty more. Jamie, Erik, Dan, Jake, and Alex, thank you for joining the team and risking it on Parsec. We’re building something revolutionary and having some fun doing it. If you want to join us, reach out!