Seed capital or seed money helps in setting the trajectory of a business. In most cases, it decides the fate of the startup as a lot of companies fail to take the first step due to the lack of seed capital. For startups, it is also quite difficult to get funding because investors generally prefer companies that have a track record. But, startups need seed funding in one form or the other and without it, the chances of their survival are grim.
Startup seed funding is required for early market research, product development, legal costs, operating expenses, etc. All of these investments are essential for the functioning of a startup. The funds are also used to pay the salaries of the team.
Identifying Seed Investors
There are several sources of seed funding but only approaching the right ones can bring the ideal results. It is important to first know how to pick an investor.
Do they have any expertise in the field?
It is usually a better decision to go with an investor who has expertise in the field where the idea or product is being targeted. They can not only guide the startup with their experience but also better evaluate the business potential.
What is their influence in the industry?
Expertise is one thing but startups also need to consider the investor’s influence in the industry. If they are well known, they will have good contacts in the industry which will, in turn, help the startup.
What is their funding ability?
It would be a waste of effort if the investor can’t provide the minimum seed capital that a startup requires. To avoid such a situation, the founders will need to do some preliminary research and background checks.
Are they easy to work with?
Finding an investor who is easy to work with is better for the long run. A more aggressive investor might want to make changes in the functioning of your organisation which is not always ideal.
Why Seed Funding Matters
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 funding helps get things started before the business earns any revenue. It is an effective solution for startups and growing businesses as it provides the much-needed early monetary support.
It can cover everything from infrastructure costs, marketing and development costs as well as the cost of initial hiring. Investment is the fuel of any business and seed funding is the first drop of this fuel. As seed money becomes much-needed cash reserve or working capital, not having it is one of the main reasons for failure.
There are several other reasons why seed funding is important:
- Cover for insufficient funds
- Reduces founder risk in the venture
- Brings strategic partners to the table
- Access to working capital
- Easier scaling up and growth acceleration
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:
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. Some examples of successful crowdfunding campaigns include the Oculus Rift which raised more than $2 Mn, Pebble wearables which raised more than $10 Mn, and Indian company Exploride, which raised more than $500K for its heads-up display for cars.
- Corporate seed funds:
This is a great source of seed funding as it comes with big visibility for the startup brand. Tech giants such as Apple, Google and Intel back startups regularly with seed money. Big companies often look at startups as a future source of profit, IP or talent, and that’s the primary motivation for investment here. 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. Most incubation programmes do not take equity from the startup but do offer support beyond just funding. The Indian Angel Network Incubator, IIT-Bombay’s Society for Innovation and Entrepreneurship or SINE, Khosla Labs and state-backed incubators such as T-Hub and KSUM are some of the most active incubators in India.
Accelerators are more focused on supporting 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. Unlike most incubators, most accelerators take equity as they are privately funded. The popular accelerators include Y Combinator, Techstars and 500 Startups.
- Angel investors
Angel investors are individuals that offer capital in place of ownership equity or convertible debt. They are called angel investors because they provide capital at times when the risk of a startup failing is fairly high, which is during the early stage. In India, the top angel investors in H1 2019 are Sanjay Mehta with eight deals this year, followed by VC Karthic, Siddharth Ladsariya, Sharan Aggarwal and Sachin Tagra – each adding seven deals.
- Personal Savings
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.
- Debt Funding
Debt mostly includes money taken from banks as loans or borrowed from friends and family. Sometimes, venture capitalists or angel investors also issue loans instead of equity investments to ventures in sectors where cash burn is high, but so is the traction.
- Convertible Securities
These are investments which start off as loans but change into equity or shares depending on the progress of the company, and when it reaches certain milestones such as sales or revenue targets.
- VC Funding
Venture capitalists are marquee investors that provide funding based on a number of parameters such as growth potential, market conditions, founder vision, idea or simply execution. In return, they take some portion of equity or stake in the startup. VCs usually join multiple rounds of investment after the seed stage, if the startup managers to reach those rounds. For seed funding, Accel Ventures, Seedfund, Sequoia Surge, Axilor Ventures, SEAFund are some of the most venture capital firms in India.
- Angel Funds or Angel Networks
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.