Over the past decade, India’s startup ecosystem has burgeoned into the world’s third-largest in terms of market size. And that has attracted a lot of investor attention towards new businesses and innovations coming from India. It is a well-known fact that any new idea needs the right market timing and the resources to take it to market. Arguably, the most crucial of these is funding. And this is especially true during the early stages when even getting talent onboard is dependent on funding.
For every startup, fundraising happens in different phases, which are dependent on the stage in which the business is currently at. In the early stages, fundraising is restricted to pre-seed investments and seed capital, with the growth-stage Series A, B, C, D rounds following these early-stage investments.
And while pre-seed funding and seed funding are raised at different stages, the primary objective for both is to give the startup enough working capital to get things off the ground. Undoubtedly, this is one of the most important processes for laying a strong foundation for a successful startup.
Seed funding, which is also known as seed money or seed capital, is quite corresponding to that of growing a plant. Just like one plant a seed and nurture it from a sprout to a plant, a startup also requires proper nurturing, and that’s where seed funding comes into the picture. But while the idea may be clear to most startup enthusiasts, the big questions are when and how to raise the seed funding.
When To Raise Seed Funding
Seed funding has gained a lot of prominence because it’s the default option for any new business — whether the funding comes from external investors, bootstrapped funds or from family and friends. So at what point should a founder look to raise seed money? Once founders have their idea and business model, it’s usually the right time to raise seed capital.
The timing of raising seed money can have a huge impact on the outcome and before deciding on the appropriate timing, founders and entrepreneurs need to be prepared with a meticulous business plan, market research and roadmap for product development.
In addition, before going ahead with the process, the product should also be ready to hit the market or at the very least in a development or prototyping stage. During the process of raising seed money, the involvement of investors means that founders need to account for product prototypes or proofs-of-concept to convince investors of the capability or the possibilities.
How To Raise Seed Money
Each startup may decide to raise seed funding at a different time, but the process of how to raise a seed funding round remains more or less the same, regardless of the sector. Of course, if this is not the first venture launched by the founder, the seed funding round becomes easier due to past connections.
But for new founders and fresh startups, it is important to understand the seed funding market and whom to approach. Remember that there is no right or wrong way as to how to get seed money, as it varies from one startup to another and startups can opt to raise seed capital from multiple sources too. However, whether approaching friends or family, incubators, angel investors or even venture capital firms, what matters, in the end, is that the seed round is large enough for the startups’ product or service to gain traction in the market or achieve the other milestones.
With that clear, here are some ways in which startups can answer the question of how to raise seed money:
Sources Of Seed Funding For Startups
On the path of seed funding, the first step is understanding the different type of investors or potential investors as there are multiple sources where one can aid from:
- Business Revenue
One of the best ways to raise seed capital is by generating revenue through the startup being built. In recent times, this method has gained prominence as it does not involve the complexity of seeking external funding or diluting stake. And it also proves that there is demand for the product in the market.A variation of this is crowdfunding, where the product is showcased to potential investors through stages of development. With more than 500 crowdfunding platforms currently active, this has become one of the most popular avenues of seed funding.
- Personal Savings Or Bootstrapping
Founders may put in their personal wealth and savings as seed funding. Also known as bootstrapping, this brings extra financial pressure but there is no pressure on founders to return borrowed money.
- Corporate Seed Funds
Usually, mega-corporations and tech giants are looking for a way to invest in new innovation that they may spot in the market. This source of funding brings big visibility for the startup brand and is usually an early indication of an acquisition in the future. Tech giants such as Apple, Google and Intel back startups regularly with seed money. GV is the investment arm of Alphabet (Google’s parent company), while Intel Capital is chipmaker Intel’s dedicated division for startup investments.
Incubators generally provide small seed investments and offer services such as office space or management training for startups that are at a very early or idea stage. Many incubation programmes do not take equity from the startup but do offer support beyond just funding. Most importantly, incubators help shape the idea and help solidify the market-fit for startup products and services.
Unlike incubators, accelerators work with startups in scaling up their business rather than backing and nurturing early-stage innovation. Accelerators also back startups through small seed investments along with professional services, networking opportunities, mentoring and workspace.
- International Philanthropic Impact Investors
When setting up a business that is dedicated to addressing a social issue, one of the main questions is how to get seed funding for such a startup. This is where startups could approach international philanthropic impact investors, who act as seed investors for startups with social impact. One of the major advantages in this class of investors is that although the foundations are large, the expectations are fewer than VCs or institutional investors, as this is a source of philanthropy for the investor and not a business deal per se.
- Micro VCs:
Apart from the above listed options, micro VCs or micro venture capital firms, have garnered quite a lot of attention in recent times. These firms are into an investment of institutional money when the startup is in the seed stage itself.
- Angel Funds
Sometimes, investors come together to form angel networks or groups where they each invest small amounts in the idea or the company during the early stage financing round. The major angel networks in the market currently are AngelList, Indian Angel Network, Lead Angels, as well as angel networks for each major startup hub in India.
Over the past few years, seed funding has gained importance in India as well. However, many startup founders are still not aware as to how to get seed money to start a business, which is why it is important to do thorough research before going ahead with any step.
Besides the options listed above, other viable options include micro-financing from non-banking financial companies (NBFCs), bank loans, and debt funding from early-stage venture funds. Government and institutional grants and R&D awards are also a great source of creating seed capital for the early moment. Always remember that adequate and timely funding is crucial as it helps startups stay afloat in a competitive market such as India, where dozens of new startups are coming up by the week.