A Student’s Guide to Seed Funds
By Aashay Sanghvi | www.aashaysanghvi.com 
I compiled this document to offer my view into the world of seed and early-stage investments. It’s tailored towards undergraduate and graduate students looking to break into careers in the space or pitch to investors but can be broadly applicable to those looking to learn more about this industry.

For background and context, I’m a senior at Harvard College who’s worked with two early stage funds — Notation and Haystack.

Pro Tip: Navigate through the guide with the tool tip on the left-hand side. 
Thanks to folks who helped review versions of this doc. 

Table of Contents

  1. What is Seed Investing? — Getting acquainted, basic definition
  1. A High Level Overview of Venture Capital — How VCs make money, why it’s different than other forms of investing, risk / return profiles
  1. Separating Seed Within Venture — Why seed is unique, mechanics of seed investing
  1. General Criteria for a Seed Investment — How investors evaluate investments, additional materials 
  1. How Seed Funds are Organized — Organizational structure and hierarchy, roles and responsibilities
  1. Getting a Job — Strategies and tactics to break in, getting comfortable with being uncomfortable
  1. The Pros of Being a Seed Investor — Working with flexibility and autonomy, finding outliers early
  1. The Cons of Being a Seed Investor — Lack of structure, long feedback loops
  1. Variable Strategies at Seed — Cadence of investing, different ownership targets, and investment filters
  1. Building Deal Flow — Where deals come from, how to see new investment opportunities
  1. Adding Value — What seed investors do to help the companies they invest in   
  1. Seed Fund List
  1. Topics for Further Exploration

What is Seed Investing?

A seed investment is a securities offering where a venture capitalist (VC) will write a (relatively) small check into a startup company for an equity stake in the business. To define a startup in order to differentiate it from other forms of companies and investment targets, I borrow from Paul Graham:

“A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of "exit." The only essential thing is growth.” — Paul Graham, Startup = Growth

Due to limited or low profitability with high cash burn, startups sell equity stakes to seed investors in the early days to get money to fuel their growth, who then participate in the upside of the business. Seed investors are investment professionals who specialize in this practice, often writing a multitude of checks per year into companies ranging from the back-of-a-napkin idea to entities producing hundreds of thousands of dollars in revenue. 

A High Level Overview of Venture Capital

Seed investing fits within the larger asset class of venture capital—capital allocated equity investment in high-growth companies. Here are a few key features of the venture capital asset class:

  • Venture capitalists typically do not offer debt to generate guaranteed yield (ex. 3%). In the long run, they hope to capture value in the company’s shareholder equity. 
  • Venture capital is different from angel investing. Angels invest their personal capital into companies, while VCs (referred to as GPs or General Partners) invest on behalf of wealthy individuals, family offices, fund of funds, endowments, foundations, universities, pension funds (referred to as LPs or Limited Partners). They take a yearly management fee and command a return of the profits. This is typically 2 and 20
  • Venture capital is incredibly risky. Arguably, it’s one of the riskiest asset classes and the hardest to make money in. Despite the risk, Fred Wilson argues in this essay why one would invest in the asset class. Large institutions, like endowments and foundations, that invest heavily (5-15% of their assets) into venture capital or private equity follow the Yale Model, pioneered by David Swensen
  • Venture has low liquidity, which means that it can take years to realize a return and make profits. VCs and their LPs usually only make money when a portfolio company is bought or goes public. These type of events can be in the range of 7-10 years after an initial investment, so VCs are expected to return multiples (think 2 - 5x) on their fund. Read this article from Michael Dempsey to understand why. 

“Venture capital is not even a home run business. It’s a grand slam business.” — Bill Gurley

Thus, venture is an asset class, just like stocks or a bonds. While the VCs are the ones giving startups money, they get their money from other sources. And just like other asset classes, there are important distinctions within venture capital. 

Separating Seed Within Venture

The sizes of the first checks seed investors will write into companies can range from $25K on the lowest end to $3M on the highest end at valuations that range from ~$1M to ~$20M. This is a wide spectrum, and you’re more realistically going to encounter a check size range that spans $250K to $1.5M at valuations that stretch from $4M to $10M. Seed investors have variable strategies and invest at different stages (pre-seed, seed, post-seed), but I’ll save those nuances. For now, it’s important to distinguish seed investors from traditional venture or growth investors. Simplistically, venture and growth investors put money to work when companies have more traction (revenue, users, etc.) and deploy more capital (typically checks north of $5M). There’s also differences between venture and growth — I don’t mean to use them interchangeably, but that discrepancy is for a separate post. 

I contend that there’s a significant mindset shift required between seed and venture/growth. Some argue that seed investors take on more risk, so they have a greater need to diversify their portfolio. At a prototypical Sand Hill Road venture fund, partners can do 1 - 2 deals / year. A partner at a seed fund could do 15 - 20 new investments in a year. Due to the volume of new deals, seed investors typically don’t take board seats or get involved with their portfolio companies in an operationally significant capacity. Finally, with seed investments, one has to get comfortable with the fact that there’s not much traction or past history to evaluate with a business. 

General Criteria for a Seed Investment