What Investors Look For in Seed Startups

Ash Rust
3 min readMar 10, 2023

There’s often a lot of confusion from founders around why one particular startup was able to raise a seed round easily, whereas another struggled. Here’s what investors at the seed stage are usually looking for:

Team

What: First and foremost, seed investors want to see a strong team. Successful serial entrepreneurs are usually the most sought after, but any well-known corporate or educational institution on founder resumes will incite interest. In the absence of “brands”, other evidence of ability may be enough, but unfortunately, that’s not the common pattern. For example, a founder, who previously built a unicorn company, will get a lot of interest, as will a team from Stanford and Dropbox.

Why: Building a company from idea to IPO usually takes ~10 years, and most seed rounds occur in the first 2 years. Thus, with the vast majority of the business still left to build, your team’s potential is the best indicator of success for investors.

Traction

What: Both customer and investor traction are exciting for seed investors, but they often move in herds, responding rapidly to the social proof of other investors getting interested. 10%+ growth/month on your core metric is interesting if it’s sustained. However, you should be aiming for above 25%/month while under $1M/year in revenue to maximize investor attention.

Why: If a well-known, “successful” investor decides to invest, then other investors will become interested as they seek to emulate that success. Investors like customer traction because evidence of overwhelming demand now may indicate a rapid approach to IPO-level revenues in the coming years.

Market

What: Investors prefer startups that operate in markets where budgets are large, distribution is easy, decisions are made quickly, and there’s minimal regulation. Of course, there is no perfect market fulfilling all these criteria. However, most US-based investors like to see market sizes of at least $5B. If you’re focused on college students in the US, that’s a large market, but you can expect investor questions on distribution and pricing; if you’re targeting Multinational Manufacturers, you should expect questions on sales cycles and regulatory compliance.

Why: Unfortunately, a tough market can be unworkable for even the best startup and a great market might carry a company that would otherwise struggle. If you’re in a small market of under $5B, you may need to control a large percentage of the market to reach the ~$100M/year revenue expected for an IPO; many investors see that as more difficult than owning a smaller percentage of a larger market.

Technology

What: Most apps are still building their core technology at the seed stage, but if you already have a technology advantage that is ~10x better than the current market standard, investors will pay attention. However, you should expect to provide both a thorough demo and any necessary 3rd party verification. For example, when Skype launched their peer-to-peer telephony system, they took the cost of international calls down to zero, a huge change from costly per-minute charges by the telcos.

Why: Large leaps forward are often claimed by founders but rarely proved. If you can offer evidence of your technology’s huge advantage, then investors will be excited because the rest of the market will find it hard to catch up to your performance. This gives you a long-term opportunity to generate big profits.

Using these guidelines will help you understand what investors are looking for and focus your pitch on your company’s key strengths, improving the chance of success.

Sterling Road invests in idea stage and pre-seed B2B startups based in the US, Canada and UK.

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