As a start-up, you are often tight on cash, especially in the early stages of setting up the company. After a young start-up has successfully acquired pre-seed financing, it moves on to the next stage: seed financing. In the previous pre-seed phase, it was still about proving that there was a solid business model with a potentially large customer base. However, many start-ups give up in this phase because it turns out that the business idea is not as strong as expected. However, if the pre-seed phase has been successfully completed, we will continue at full throttle seed phase.
To get to the coveted seed capital To get there, start-ups have to create a coherent business plan that convinces investors, business angels, banks or venture capitalists. When creating a business plan, however, some special features must be taken into account. This article is the second part of the “Start-up Business Plan Special” and goes into the most important parts of a seed business plan a.
What is the difference between pre-seed and seed phase?
Anyone who wants to gain a foothold as the founder of a start-up cannot avoid the “Silicon Valley” start-up term. This complex jumble of New Age terminology is often mysterious and intimidating to outsiders and newcomers to the startup scene. Understandable, because a conversation among experienced “start-uppers” can quickly become a linguistic nightmare for prospective entrepreneurs, since you cannot understand the terms and their meaning. Therefore, we want to provide ongoing assistance in differentiating between different start-up terms: as in this article on Distinction from pre-seed and seed phase.
the pre-seed phase is characterized by the fact that no product or service has yet been established on the market. In the pre-seed phase, the product has not yet been completed and the focus is on validating the business idea. This can be validated in many ways and instruments. In the first part of this Business plan specials for start-ups, it was explained in more detail how reliable evidence can be provided.
The following will pre-seed phase short summarized:
- financing volume: mostly between 50,000 euros and 250,000 euros
- milestones:
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- The minimal viable product (MVP) has been completed and can be used rudimentarily
- The market has been clearly identified and the way to the market is planned
- valuation:
- Typically between one million and three million euros, depending on the industry
- phase duration: three to nine months
- Typical investors: accelerators, friends, family and business angels (private investors)
Now how does it differ? seed phase? As the name suggests, the “seed” from the pre-seed phase has now been planted. The preliminary work done in the previous phase now serves as topsoil and fertilizer for the start-up. The aim of this phase is to feed the planned KPI (Key Performance Indicators) with real data. Consequently, it is now time to identify the “Product-Market-Fit”, i.e. to underpin the evidence that the product or service is accepted on the market with measurable data. This is achieved when the first sales flow and, for example, the web analysis shows a clear “traction” (increasing number of visitors) on the website. At this point in time, one certainly does not yet have a clear view of the complete profit and loss account (P&L), but the assumptions from the pre-seed phase can be further strengthened or invalidated.
At the latest at this point in the company structure, it is also essential to have a functioning and good well-rehearsed founding team or personnel. Anyone wishing to acquire financing in this phase must be able to demonstrate that they have a strong team and relevant specialist knowledge. Because it is still for investors It is a high risk to invest in this phase of a start-up. In order to be able to promise future investors more security, the conditions just explained here are essential.
Explanation of the seed phase:
- financing volume: usually between 500,000 euros and two million euros, depending on the industry, much more
- milestones:
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- The product market fit was demonstrated and the marketing measures generated the first potential customers
- A highly qualified team was assembled to build the company
- valuation:
- Typically between five million and 15 million euros, depending on the industry
- phase duration: 12 to 18 months
- Typical investors: Business Angels and Industrial Investors
The perfect business plan for seed financing
As soon as you are clear in which phase you are currently in as a company, it is important to financing documents to put together. These documents serve as a business card for the start-up and should definitely be obtained from a expert advice be checked in advance. During this phase, many start-ups make use of external support and have their documents, such as the Create business plan.
In contrast to the pre-seed phase, in which special attention was paid to the MVP and the identification of the target market, it is now important, in addition to these findings, to also show that the first customers are already interested in the product or, ideally, are already using it and pay for it. Another focus should be on the competencies of the founding team. The customer’s interest in the product can be proven with the product-market-fit.
The following explains this important part of the seed funding business plan:
The product market fit
“Product-Market-Fit”: A start-up usually assumes that that product successful will be sold, whether this look into the crystal ball is now proving to be correct is difficult to say without suitable instruments for producing evidence. Because start-ups often open up completely new markets, which cannot be foreseen from the experience of the existing market. To be on the safe side here, the “product market fit” should be checked.
The PMF explains to what extent the newly developed product actual demand served on the market. If this cannot be provided, it will be very difficult, if not impossible, for a young start-up to attract investors.
Example of a message in a bottle
If you look at the history of the delivery service Flaschenpost, the concept of the Product-Market-Fit as a prime example on. Before the pandemic, it was rather unusual in Germany to have your drinks delivered to your doorstep. During the first lockdowns in 2020, the company Flaschenpost made a big international media fuss when none other than Dr. Oetker has invested many millions of euros in the company.
Message in a bottle was on the one hand right time in the right placebut much more they have one for investors strong evidence provided that their product, i.e. the home delivery of drinks, was taken off the market assumed and even second hand becomes. Of course, this is a blatant example of evidence, but start-ups should try to address future target customers as precisely as possible and get to the root of their problems.
Prerequisites for Product-Market-Fit
Even if still no product on the market was introduced are as follows requirements valid for the provision of the PMF
- The target customers have a clearly identified one problemwhich one of the target group communicated solution requirement. Simply put: If there is no problem to solve, there is no point in developing a market.
- For the target customers there is no arguments the product not to buy.
- The product satisfies the needs of the target customers and compared to the “state-of-the-art” brings a real and measurable improvement for the target customers.
If the product has already been presented on the market, it is particularly important to feed the PMF with data. This PMF data will be about metrics determined. Metrics can be:
- a high conversion rate
- Low CAC values (CAC=Customer Acquisition Costs)
- Low churn rate (the churn rate means how many potential customers drop out of the purchase process again)
- high recommendation rate from customers
If it’s after Inventor of Product-Market-Fit developer Andy Rachleff, the product should even sell itself without any marketing. It remains to be seen whether this very extreme view is really realistic. Nevertheless, the “spirit” should come across clearly here: the target customer should literally long for the product and, if necessary, even start looking for it on their own solution to his problem make!
In addition to the to be provided evidencewhich the economic viability and market relevance documented, is a well elaborated one business plan included financial plan for the next three to five years and an attractively designed pitch deck (brief presentation of the business idea on a few presentation slides) basic requirement for addressing investors. This serves primarily to summarize all considerations, plans and forecasts of the business start-up. In addition, a well-developed financial plan is the door opener to financing by investors.
Find the right financing partner
How to acquire the right financing partner is now of some factors dependent. How tall is it capital requirements? which sales could already be retracted? Which company shares should be sold? First of all come for medium to high financing volume in this phase especially business angels and investors like to support the development of the market. There are also some accelerator programs and venture capital offices that focus on support in the seed phase have specialized.
In order to get the coveted seed capital of these investors in the first place, business founders have to draw up a professional business plan. Help in the form of business start-up advice can be useful here.