How do we go about raising seed money for our startup that is at this point nothing much but an idea (working towards a prototype), team (2 technical persons with over 10 years experience in programming in good peer understanding) and a hot market (search and recommendation engine).
We've been bootstrapping since few months and working part time on the prototype but unfortunately, its taking longer than expected. At this point, we are hoping to go full time and may be hire 1-2 more developers to speed up the process. Thus, looking to raise some seed money. My questions are, do VCs invest in startups who doesnt even have a prototype? How do I calculate how much to raise? For how much %? And finally, how to approach them?
Long question, but easy answer: no.
Vcs almost never invest in the kind of company you describe.
You say you are two programmers: that's great! Keep working on it a bit longer and get something going. The only other approach I can think of (if this is B2B) is to start lining a pre-order or two from businesses interested in your product. That would be a strong signal for investors that you are up to something.
You may be able to get some money from an incubator fund if you have a strong pitch and have done some research into your market.
@Alain is right. In general the type of company you have is unfundable unless you have THE TEAM - got anyone who helped start Google, MS, Facebook?
Investors would only invest in that type of company if the right person was on the team.