What investors look for in a seed round

A seed round is usually the first time a company asks outside investors for meaningful capital. The product may be live and a few customers may be paying, but most of the value still lies ahead. Investors know this. What they are really asking is whether this team, with this evidence, can reach the next milestone with the money on offer.

The team comes first

At seed, investors back people before they back spreadsheets. They want to know why this team is the right one to solve this problem: relevant experience, a real understanding of the customer, and the ability to build and sell.

Gaps are normal at this stage, but they should be known and planned for. A technical founding team with no one selling needs a clear plan for how revenue will come. Investors also look for commitment: founders working full time, with meaningful ownership and a reason to stay for the long haul.

Evidence over ambition

The strongest seed companies separate what is proven from what is projected. Proof might be a live product, a signed pilot, paying customers, repeat usage or a letter of intent from a serious buyer. Projections are everything else.

Investors will discount a forecast heavily, but they will pay attention to a small number of real signals. Lead with those. Ten customers who renewed tell an investor more than a slide promising ten thousand.

Ten customers who renewed tell an investor more than a slide promising ten thousand.

A market worth winning

The opportunity needs to be large enough to matter if the company succeeds, and specific enough to be credible. A focused first market, with a clear route into adjacent ones, usually reads better than a claim to a vast global market from day one.

Investors will also ask why now. A change in regulation, cost, technology or customer behaviour that makes this the right moment is one of the most persuasive parts of a seed story.

Sensible terms

A valuation that is too high can hurt a company later, when the next round has to be priced above it. Many seed rounds see founders sell somewhere between 10 and 25 per cent of the company, though every round is different.

Be clear about the instrument. A priced equity round, a convertible note and a simple agreement for future equity each have different consequences for control and future dilution. Investors appreciate founders who understand the terms they are proposing.

A clear use of funds

Explain exactly what the money buys and what it gets the company to. Most seed rounds aim to fund 18 to 24 months of work towards the milestones that will support the next raise, such as a revenue level, a product release or a key partnership. A budget tied to those milestones shows discipline.

A tidy house

Due diligence at seed is lighter than later on, but basic hygiene still matters. Investors will expect:

• a clean, up-to-date capitalisation table
• intellectual property owned by the company, not by a founder or contractor
• signed founder and employee agreements
• recent management accounts and a simple financial model
• key customer and supplier contracts in one place

Problems found late slow a round down or change its terms. Problems disclosed early rarely do.

How we assess seed opportunities

When Fortis Arbor Capital reviews a seed company, we compare it with strong seed companies, not with mature businesses. We keep what is evidenced today separate from what depends on forecasts, and we only introduce opportunities we would be comfortable putting in front of our own network.