How Do I Raise Seed Capital If I Don’t Know Any Investors? – Part 2by Scott Edward Walker on October 20th, 2010
This post is part 2 of my three-part series: “How do I raise seed capital if I don’t know any investors?” In part 1, I discussed the importance of hustling and building relationships in order to get warm introductions to investors. In this post, I will discuss a different approach: applying to one of the mentorship/seed capital programs.
Mentorship and Seed Capital Programs
A very exciting and relatively recent development in the startup world is the proliferation of mentorship programs for entrepreneurs. Indeed, these programs typically include not only teaching and coaching, but also seed capital (as well as introductions to investors). Thus, for first-time entrepreneurs who have little experience, money or contacts, these programs offer a “win, win, win” opportunity. Below is a brief description of the top three programs.
1) Y Combinator
Y Combinator does seed funding for startups. Seed funding is the earliest stage of venture funding. It pays your expenses while you’re getting started. . . . We make small investments (rarely more than $20,000) in return for small stakes in the companies we fund (usually 2-10%).
YC runs two three-month programs per year: one from January through March and the other from June through August. Entrepreneurs must move to the Silicon Valley area to participate. As Paul discusses at length in his essay, “What Happens at Y Combinator,” each program includes (i) weekly “dinners” with successful startup founders as speakers; (ii) “office hours,” which comprises unlimited individual conversations with the YC partners over the course of the program (and half of the founders’ time); (iii) “Angel Day,” at which each startup is paired with two angel investors who will meet with the founders regularly thereafter; and (iv) “Demo Day,” the program’s culmination – a three-day event, with 4+ presentations to an audience of approximately 400 (including many of Silicon Valley’s top investors).
YC has funded over 200 startups, including Loopt, Reddit, Wufoo, Scribd, Disqus, Dropbox, Justin.tv and Posterous. You can apply to YC here; and check out their FAQ’s here. (See also “How Y Combinator Is Remaking Silicon Valley in Its Image.”)
TechStars is a similar three-month program, which was founded in 2007 by investors David Cohen and Brad Feld; it is offered once per year in four different cities: Boulder, Boston, New York and Seattle. Startups receive up to $18,000 in seed funding for a 6% equity stake, intensive mentorship and the chance to pitch to investors at the end of the program.
As noted on the TechStars website:
About two or three nights a week, we’ll organize informal educational sessions with our mentors. We also expect many of the mentors to drop in to TechStars at various times throughout the program. In general though, you’ll be working on your product each day, just like all of the other founders in the program. We don’t tell you what to do or when, but we create an environment that is conducive to helping your startup every day. And we’ll make sure you have lots of experienced mentors around to help you.
TechStars provides a detailed web list of all companies that have participated in its programs, together with their full historical results. There is also a 5 minute video by Current TV which provides a sense of what TechStars is like, and you can watch “The Founders,” which consists of 14 five-minute episodes that follow three teams through the 2009 program.
Founder Institute (FI) was founded by Adeo Ressi, a serial entrepreneur and founding member of TheFunded, Incorporated, in 2009 and is different from YC and TS in the following material respects. First, rather than receive seed capital, entrepreneurs are required to pay a $50 application fee and a $900 course fee upon acceptance.
Second, FI takes a small percentage (3.5%) of warrants in the startup, which provides FI with an option to buy stock at the price set during the company’s first qualified financing round; warrants are deposited in a “Bonus Pool” that is shared among the other founders, the mentors, the local operators and FI.
Third, if the startup is successful and receives financing in excess of $50,000, it is “asked” to pay FI a one-time “Tuition Fee” of $4,500. And, finally, FI only requires a commitment of approximately 15 hours per week (a mandatory three-and-one-half-hour weekly session and between five and ten hours of assignment work that needs to be completed before the following session).
FI currently offers programs twice per year in Silicon Valley, Singapore, Seattle, Los Angeles, San Diego, Denver, Houston, Boston, New York, Washington DC, Paris, Brussels and Berlin. As noted on the FI website:
The Founder Institute is a technology startup accelerator and entrepreneur training program currently on pace to launch over 500 companies per year in over 13 cities worldwide. The program identifies high-potential entrepreneurs using predictive social science testing, and then guides them through weekly company-building sessions featuring a network of over 250 CEO Mentors. All program stakeholders, including the participating founders and CEO Mentors, share in the equity generated by companies formed in the program. In addition, participants get access to free and discounted services, and are not required to quit their day job.
4) Other Programs. Below are some of the other mentorship programs:
ShotPut Ventures – Atlanta, GA
Capital Factory – Austin, TX
LaunchBox Digital – Durham, NC
SeedCamp – London (and mini-events throughout Europe)
Launchpad LA – Los Angeles, CA
DreamIt Ventures – Philadelphia, PA
I hope the foregoing was helpful. Next week, in part 3, I will discuss applying directly to angel groups, such as AngelList and Open Angel Forum. If you have any questions, please feel free to call me directly at 415-979-9998. Many thanks, Scott