Seed capital or seed money refers to the initial funding used to start a new business or product. It can be a sum of money obtained from the founder’s personal assets, family or friends. Entrepreneurs across the world rely on seed funding to aid and support their ventures.
Raising seed funding is the first and foremost step in creating a successful business venture. It allows founders to map out a business plan and covers the initial operating expenses. There are several seed funding companies in India and various other countries across the globe that invest in the ventures put forward by aspiring entrepreneurs and aid their endeavours. So, read on to know more about raising seed capital.
What Is Seed Round Financing?
Startups go through many rounds of financing before they become capable of generating enough revenue to finance their own operations and function independently. The seed-stage financing or the seed round funding is the earliest funding round. It is a crucial period when money is raised to build up the business and cover early-stage expenses such as product development and market research. Seed money is generally obtained from third-party investors that include the founder’s family, friends or more experienced investors such as seed funding companies and individual angel investors. Many venture capital firms provide the business owners with capital to fund their ideas in return of partial ownership of the business. So, when the business becomes successful and reaches the stage of profitability, investors can earn profits by selling their shares.
Related Article: Seed Funding For Startups: Stages, Investors, Timing And Sources
The Need For Startups To Raise Seed Money
Often, the amount of capital required to take a startup to the stage of profitability is significantly more than the founders or their family and friends can provide. The purpose of raising seed funding for startups is to equip them with the capital they require to develop the kind of foundation that generates a profitable business. The money obtained by seed round financing is generally used for things such as market testing ideas, hiring instrumental staff and further developing minimum viable products (MVPs). After raising seed money, a startup can also use the funds for ironing out any flaws in the business model. There are several benefits of seed-stage financing, which
- Founders get more money and time to fine-tune their business model.
- They get an opportunity to make connections with instrumental business partners.
- It supports lower dilution and more money for future rounds.
- It provides more flexibility to change course and pivot according to the demand of the market.
Deciding How Much To Raise In Seed Funding
Every founder wonders about the amount of seed capital they need to raise for jumpstarting the new business. The most obvious answer is “as much as possible”. If a founder can raise a huge amount in the seed round funding, there would be no need to ask investors for money in the future. Ideally, founders should try to obtain enough capital to take their business to a stage of profitability. However, it may not be possible at the initial stage and the founders may need follow-on funding rounds for the future development of the business. While raising seed funding, founders should aim for enough money to last them till they reach their next funding milestone, which is generally after 12-18 months.
There are several tradeoffs and factors that determine the amount of seed money needed to reach the next milestone. These factors include credibility with investors, the duration of requirment, size of operation and plans for further expansion.
The amount of required seed money also largely varies according to the vision for the startup. Make sure to take on proper seed funding valuation before giving the presentation to the investors. Keep in mind the following factors during the presentation:
- Have a clear idea of the monthly expenditure estimate concerning initial requirements before going ahead with the presentation.
- Have a discussion with the investors. There is a huge possibility that the budget presented may seem more/less to the investors. They might be relatively more experienced and can probably give some good advice to founders to improve financial management.
- Clearly define and make an estimate of the key milestones or timelines. It will provide the founders with a precise financial roadmap as well as make it easier for the investors to believe in the vision.
- Don’t be very rigid and try keeping a little wiggling room; the presentation won’t be effective if it comes across as non-negotiable. However, also try not to be overly flexible or the startup may end up being under-funded.
There are a lot of sources that aid budding entrepreneurs in their business ventures. Hosts of seed funding companies in India and abroad are willing to invest in ambitious and innovative founders and entrepreneurs.
Ideally, founders should give up shares or equity worth as little as 10% of the startup in the seed round. However, most cases require up to 20% dilution but it should be remembered that anything over 25% may be a bad deal for the founder. Knowing the investor’s intent may help founders out during the negotiations. Acquiring a satisfactory amount of seed money can do wonders for new startups, help them make a real impact and grow beyond expectations.