As many have claimed before funding can be the lifeblood of a new business, and startups typically raise funding at different stages such as pre-seed, seed and series (A, B, C, D and so forth), depending on the progress they have made in developing their products or services.
In the initial stages, the amount required to start up is quite low and this usually comes under the pre-seed or seed funding round. Besides family and friends, there are some investors or companies who are also willing to invest in startups and over a period of time, there has been a steady rise in seed funding rounds as well.
The concept of seed funding for startups has been around for years; it is a very important stage in a startup’s lifecycle as it acts as the foundation which can very well determine future success.
Seed Funding For Startups: Stages, Investors And Sources
The first step in a startup’s funding life cycle is usually the seed funding or seed stage funding stage. This is a very early investment round that helps a business grow and generate its own capital. In seed funding rounds, investors often get equity stake in exchange for the capital invested.
In many cases, the seed round investors include the startup’s founders who use their savings as seed money for the new company — also known as bootstrapping. Sometimes, founders raise money through their friends and family as well, while these days angel investors are also lining up to invest in startups early.
Pre-seed rounds help a startup get things going without needing a bigger seed round. The pace of pre-seed funding is dependent on initial expenses for setting up the business, which varies based on the sector. Even though it’s not a major funding round in terms of amount, pre-seed funding is extremely crucial for a business and is often the difference between make or break.
The timing and the manner of raising pre-seed funding are both considered highly critical to the success of the startup, as it determines how far the startup can go in the first few months. Since startups at this stage don’t have real traction or a fully-functioning prototype, it’s important to convince investors about the long-term vision and the capability to take things to the next level.
One of the biggest challenges in this regard is convincing seed investors to put money in startups that often have no real traction or a full product. That’s why it’s important to approach the right investors and have a pitch deck that’s able to convince them about the startup’s potential. Additionally, founders need to make sure that they do the market research to get information about how to develop and tweak their products or services, based on the competition or the appetite of the consumer or customer base.
It is a fact that starting a new business and lifting it up off the ground is a huge ask for most entrepreneurs and it only gets tougher with capital constraints. Seed capital helps get things started before the business earns any revenue. This round usually covers expenses such as infrastructure costs, marketing and development costs as well as the cost of the initial hiring.
One of the most crucial aspects in fundraising is the timing of raising seed money. This can have a huge impact on the outcome and long-term success. Founders and entrepreneurs need to be prepared with a meticulous business plan, do adequate market research and create a roadmap for product and revenue, that will help convince users. If these things are not ready, perhaps the startup is not quite ready to raise seed funding.
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. 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.
There is no right or wrong way as to how to get seed money, as it varies from one startup to another and similar changes from investor to investor. What matters is that the seed capital round is large enough to ensure sustainability till the next funding round.
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 first thing founders need to understand is that a seed funding pitch deck differs from other presentations. It makes the first impression of the startup. It is a brief presentation that a founder or entrepreneur presents to potential investors, partners and cofounders to give them an overview of the business plan at the early stage as well as the roadmap and plans for the future.
The objective of the pitch is to bring investors on board for seed funding, which will be the foundation for the new company. The seed funding pitch deck is mostly created using common software such as PowerPoint, Prezi or Keynote, but one can also use Adobe Indesign to create impactful presentations – whether for in-person pitches or virtual presentations.
It is believed that whenever a startup can raise money, it should. But, there are a few things that entrepreneurs should keep in mind to increase their chances of getting what they want from who they want. A startup must first know if it is ready for seed-stage financing or not. And this is just about answering a few questions:
- Is The Right Team in Place?
- Has The Startup Worked With Industry Experts?
- Is There A Prototype?
- Have The Potential Investors Been Vetted?
- Is There A Story For The Investors?
- Has The Product Been Tested?
Falling in the hands of a wrong type of investor might result in the rapid downfall of the business, or undue pressure. Any investment is crucial for a startup, but seed investors set the tone for the rest of the business life cycle. This is why choosing the right investor is of utmost importance. However, while vetting potential investors, startups and founders need to avoid overvaluation or undervaluation of the business.
Before looking and researching the investor ecosystem, it is best to calculate the amount that will be sufficient for facilitating a smooth runway of the business. Another thing to remember is not to rush while selecting seed investors. It is best to be patient and select those who have adequate funding and are willing to assist in the future rounds of fundraising.
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:
With more than 500 crowdfunding platforms currently active, this has become one of the most popular avenues of seed funding. Crowdfunding platforms are usually open and anybody in the world may end up backing the concept, idea or product.
- Corporate seed funds:
Tech giants such as Microsoft, Amazon, Apple, Google and Intel help support startups at an early stage with seed capital. Big companies often look at startups as a future source of profit, IP or talent.
Incubators generally provide small seed investments and offer services such as office space or management training. Most incubation programmes do not take equity from the startup but do offer support beyond just funding.
Accelerators are more focused on supporting startups in scaling up their business rather than backing and nurturing early-stage innovation, providing professional services, networking opportunities, mentoring and workspace.
- Angel investors
Angel investors are individuals that offer capital in place of ownership equity or convertible debt. T
- Personal Savings
Also known as bootstrapping, this brings extra financial pressure but there is no pressure on founders to return borrowed money.
- Debt Funding
Capital raised by borrowing from banks or from friends, family, venture capitalists or angel investors.
- Convertible Securities
These are investments which start off as loans but change into equity or shares at a later stage.
- VC Funding
Venture capitalists are groups of marquee investors that provide funding, usually over multiple future rounds, and major support to startups.
- Angel Funds or Angel Networks
Angel networks are groups of angel investors, where each invests a small amounts in the idea or the company during the early stage financing round.
This is a crucial question that will determine how much money the startup can raise. In simple terms, startup valuation is the process of quantifying the worth of a company, aka its valuation. During the seed funding round, an investor pours in funds in a startup in exchange for a part of the equity in the company.
This is why valuation is important for entrepreneurs as it helps in determining the equity which they have to give to a seed investor in exchange of funds. It is also of great importance for an investor as they need to know how much company’s share they will receive in lieu of the funds invested during the seed stage.
So, fundamentally, startup valuation can prove to be a real deal maker or breaker, which is why valuation does not involve any guesswork on the basis of valuation of other similar startups. Instead, the focus is on the startup in question and how it has built up the business and its assets.