The High Stakes and
Hard Work of the
Seed Round

Learn how used our survey data to examine the metrics surrounding the Seed round.

Content

The Seed Squeeze: A Precursor to Pitching in a Pandemic
The Evolution of Seed
From Why Now? to What’s Next?
Anatomy of a Successful Seed Raise
The Funding Divide in the Seed Round
Setting the Benchmark for a Challenging 2020
Closing the Gap: The DocSend Fundraising Network

The Seed Squeeze: A Precursor to Pitching in a Pandemic

The seed round is no longer the first step in working with established VC investors. With the pre-seed round now the de facto first round for many founders, the stakes are now higher in the seed round. With more money on the line, a longer fundraising cycle and increased pressure for market traction, the seed round is a make-or-break stage for founders. Founders’ experience raising funds in 2019 truly set the stage for the challenges of 2020.

As a follow-up to the pre-seed report published earlier in 2020, DocSend studied the fundraising process of 175 startups at the seed stage in 2019 and analyzed data to understand which seed startups were successful in fundraising and why. Through comparing data from our first seed report in 2015, our analysis shows how the seed round has evolved since then and how the process and expectations have become more intensified today. Further insights from our 2020 Pitch Deck Interest metrics also indicate that the experience in the seed round is amplified in an unprecedented market environment.

While investors in pre-seed startups focused on the “Team” and “Why Now?” slides to determine the promise of a company and its ideas, investors in the seed round are looking at other factors in making the decision to fund. Seed startups are putting more emphasis on slides in their deck like “Traction” and “Product” that indicate progress and maturity.

At the same time, VCs are scrutinizing founders and their pitch decks with more efficiency and a sharper lens — they are clearly becoming more adept at scanning and filtering out which startup has potential and quickly discarding the rest. 

All of this results in an experience that we call the “Seed Squeeze”: fundraising amidst the pressure of a more discerning and decisive investor and an increasingly demanding market expectation for a seed-stage startup.

There are other challenges for some startups: DocSend’s analysis also indicates that as startups progress to the seed round, the demographic and geographic makeup of founder teams that get funded becomes more homogenized. Data shows that white, younger male founder teams from the West coast tend to raise more money, more easily.

The intensified seed round experience documented in 2019 in essence became a harbinger for the more competitive fundraising process that all startups face because of the pandemic. In the seed round, a clear, concise pitch deck is a mainstay for funding success. With fundraising now occurring exclusively in the virtual world, the efficacy and focus of a founder’s pitch deck is even more magnified. Founders must produce a concise pitch deck that clearly illustrates the information that matters most to investors. 

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The Evolution of Seed

A longer round with greater rewards
Since 2015, the seed round has transformed into a make-or-break round for founders. The checks are bigger, but so is the amount of work — and time— to close a round. Startups in the US continue to outpace the rest of the world (ROW) in seed fundraising.

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Compared to 2015, founders are contacting more investors but netting the same amount of meetings. And while founders who ultimately didn’t receive funding contacted slightly fewer investors (70 as compared to 77), they only averaged 15 meetings. 

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But since 2015, the potential stakes have gone up when a founder does secure a meeting. The average amount raised per meeting (which is a good metric to measure fundraising efficiency) in 2019 was $52,600, an increase of almost 40% since 2015. The entire process is longer, though: at an average deal cycle of 21 weeks, it took founders nearly two months longer to close their rounds in 2019 as compared to 2015.

By examining the evolution of the seed fundraising process and the new challenges startups face at this stage, the Seed Squeeze becomes apparent.

From Why Now? to What’s Next?

The data shows us that in the pre-seed round, VCs were more focused on the Why Now? sections of founders’ decks. Even in pre-pandemic conditions, investors first and foremost needed to know if a company was well-suited to enter the market at a given point in time.

In the seed round, however, investors trusted that if companies had already secured early funding, the “why now?” vetting was already determined. So what’s next as investors look for progress in seed-stage companies?

You need a (nearly) finished product and demonstrable traction
Everyone wants a product that’s ready to ship. Pre-seed investors greatly favored companies with at least a minimally viable product (MVP) with 93 percent of successful decks having at least an alpha, if not a live product to offer.

The focus on in-market products becomes more heightened in the seed round — not only did successful companies have product slides 10 percent more often, but they also had at least one more page of product details than their unsuccessful counterparts. 

Investors expect an available product in the seed stage, but they also need evidence of traction in the market. “Traction” refers to any measurement of product success: the number of people using the product, % of repeat users, types of customers, success in competitions, industry awards, credible testimonials, and even revenue for those companies already in the market. 

While 1.6 pages was the average length of the Traction section for a pre-seed round, 2.3 pages was the average for successful seed rounds. Also, 75 percent of successful seed founders had demonstrable traction, as opposed to just 60 percent in pre-seed.

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Anatomy of a Successful Seed Raise

While some aspects of a seed round appear to be universal, such as having 20 slides in your deck, there are others that can vary wildly depending on where your company is based and which VCs you’re targeting. 

Successful seed deck sections…

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…with successful order and pages on each section.

Aside from the Product and Traction slides, VCs are also focused on the Business Model in successful decks. It ranked first in time spent for both successful and unsuccessful decks, it also averaged half a page longer in successful decks.

VCs in the United States are following the same pattern we saw in 2015 and our recent pre-seed research: seemingly counterintuitive, the more time an investor spends on a deck actually corresponds to a less successful outcome.

When VCs spend more time viewing a deck, they are likely scrutinizing and questioning its content more, often leading to an unsuccessful outcome. However, that doesn’t mean the time they spend on individual sections is evenly distributed. In fact, in successful decks we found that VCs spent the most time in the deck on the product and business model slides. When done well these sections will be robust and will have valuable information that the VC is looking for to make a decision.

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Pitch deck interest over time

However, American VCs are scrutinizing decks with more efficiency than in 2015. In 2019, the average amount of time VCs viewed decks was 3:27 vs. 3:44 in 2015. This could mean VCs know what information they are looking for and what progress they want to see in seed round pitch decks and don’t need to spend a lot of time looking for it.

According to DocSend’s new Pitch Deck Interest weekly metrics, this trend is continuing in 2020: investors are spending even less time on pitch decks, with the current 30-day trailing average being 2:50 minutes.

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Avg fundraising time

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Avg time spent on pitch decks

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Contacting more investors isn’t a winning strategy for the seed round (much like it wasn’t for pre-seed). While it has the potential to garner more meetings, it doesn’t equate to more funding. For the seed round, it’s important to contact the right investors vs. a larger number of investors as founders are securing more funds per meeting in the seed round than in previous rounds. 

Investors contacted vs meetings

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Investors contacted vs amount raised

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The Funding Divide in the Seed Round

In the seed round, the data shows us that there is a funding divide based on demographic characteristics of founders: geographic location, age, and unfortunately still, gender and race play a factor in their fundraising success.

The homogeneity of gender, race and location further tightens the Seed Squeeze. As female and minority founders move to more advanced rounds of fundraising, their representation and relative success drops off. Female founders also must contact more VCs only to raise less than their male counterparts, and minorities weren’t able to raise as much as all-white teams. 

Gender and Race
According to the data, women and minorities still faced significant barriers to success when it comes to seed fundraising.

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Funding by Region
In a pre-pandemic, less virtual world of fundraising, investors in the seed round greatly preferred and rewarded founders based in the Western United States. West-Coast founders, particularly those in the Bay area, raised significantly more than any other group.

Now as investors and founders rely on their pitch decks to tell their story and use video conferencing technologies like Zoom to compensate for the lack of in-person meeting opportunities, the geographic bias is likely to diminish to some degree. 

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Time Spent on decks by VCs by Age Group
Those that had the clearest decks were in their 40s, with VCs only spending 3:17 reading them, where they spent 3:51 on decks from founders in their 20s. Founders in their 50s not only came in last for the amount raised, but they also had the most time spent on their deck (topping 6.5 minutes).

Average Amount Raised by Age Group
The most successful founders in the seed round were those in their 20s. They were able to raise 3% more than founders in their 30s, 14% more than those in their 40s, and a whopping 44% more than those in their 50s. 

Average Investor Meetings by Age Group
Overall it’s clear that founders in their 20s had the most efficient fundraise. They managed to raise the most money in just 35 meetings, which gives them $54,911 per meeting. Teams in their 30s and 40s were only able to raise $44,124 and $41,647 respectively. Teams in their 50s were bringing up the rear with only $31,569 per meeting.

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Setting the Benchmark for a Challenging 2020

2020 has been the most unpredictable of years, and that’s likely not going to change. From a pandemic, to a tumultuous economy, to widespread social unrest, to a presidential election, the turbulence ripples through the startup market. While some elements of the fundraising process stay the same, many other parts are rapidly shifting and have become more magnified. 

This year DocSend began monitoring data on the fundraising process in real-time to track these trends more closely. The Pitch Deck Interest metrics in our Startup Index demonstrate some marked changes. 2020 Pitch Deck Interest –  the average number of pitch deck interactions by investors for each founder – is indexing well above usual levels during a normal summer lull. And average links created per founder (to pitch their decks to investors) and average investor time spent per pitch deck reached highs and lows we haven’t seen in years. 2020 was an outlier.

The 2019 seed data is an important pre-pandemic benchmark to how the fundraising process has changed over time and become more challenging for founders. The way investors were consuming pitch decks was already highly formalized and methodical, a trend that was only enhanced by work from home orders and the pandemic. The insights we have into 2020 tell us that the diligence on both sides continues and the reliance on pitch decks to tell the startup story is firmly rooted. As investors continue to operate from home – unable to rely on lunch meetings or in-office visits or meetups at conferences – pitch decks and Zoom meetings are their primary tools for sifting out the good investments from bad. 

For better or worse, the fundraising demands of 2019 have prepared seed-stage startup founders for a digital-first approach to pitching investors and closing deals this year and beyond. 

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Closing the Gap: The DocSend Fundraising Network

As the fundraising environment evolves, new tools and methodologies are likely to follow. The DocSend Fundraising Network for example, connects qualified founders with the right VCs who are looking for new investment opportunities based on a data-driven methodology derived from this research. This approach relies on data to connect VCs and founders not only helps facilitate connections in a virtual business world, but also helps to remove inherent bias from traditional fundraising approaches. The service is available for Pre-Seed and Seed fundraising rounds and is planned to soon expand to Series A rounds.

To apply for the DocSend Fundraising Network, go here. 

Methodology
DocSend analyzed pitch decks of 175 startups that identified themselves as seed fundraising. DocSend also surveyed these companies to gather additional data and insights. All of the data analyzed comes from companies that opted into the analysis. The data was collected and analyzed throughout 2019.

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