Seed Financing

Financing used to start a business.

The word seed capital refers to financing used to start a business. For example, private investors provide funding in exchange for an equity stake in the company or a share of the profits from a product. 

seed financing

A large portion of a company's seed capital may come from sources close to its founders, such as family, friends, and acquaintances. The first of four funding stages for a startup to become an established business is the acquisition of seed capital.

It is the funding of a business at the earliest stage of its life cycle, usually at the idea stage, with only a plan, prototype, or trial phase, and with few or few customers.

Seed funding is the first stage of funding for a startup. It is frequently provided by angel investors, friends and family members, and the original company founders. A startup in its early stages may seek funding through bank loans, but angel investments are usually preferred. 

It is used to start a company and is, therefore, a reasonably high risk: the company has not yet proven itself in the market. Many angel investors focus solely on seed funding opportunities because it allows them to purchase a portion of the company's equity at its lowest valuation.

Basics of Seed Financing

A startup company may have limited access to funding and other resources. In addition, banks and other investors may be hesitant to invest because there is no history, track record, or measure of success. 

Many startup executives seek initial investments from people they know, such as family and friends. This type of funding is known as seed capital.

Seed capital, also known as seed money or seed financing, is money a business raises during its infancy or early stages. It does not have to be a lot of money. However, it is frequently a small sum because it comes from private sources.

basics of seed financing

This money typically only covers the necessities for a startup, such as a business strategy and initial operating expenses-rent, equipment, payroll, insurance, and R&D costs (R&D).

At this point, the primary goal is to secure additional funding. This entails attracting the attention of venture capitalists and banks. Unfortunately, unless it comes from a successful serial entrepreneur, neither is inclined to invest significantly in a new idea that exists only on paper.

It is intended to provide a founding team with sufficient capital to pursue a specific idea or market to prove the concept's viability. Investors may have different criteria for a seed-stage company, but they are all looking for a product-market fit.

Seed Financing V/S Angel Investing

Startups, by definition, seek rapid expansion. Almost all startups will fail if they do not receive startup funding. The money needed for an entrepreneur to break into a market usually outweighs what family, friends, or traditional financing options can offer.

High-growth businesses must burn through the capital to achieve profitability and long-term viability. While some startups have never received outside funding, they are the exception rather than the rule.

Professional angel investors may provide seed capital in the form of a loan or exchange for equity in the company. These investors are typically high-net-worth individuals who may come from the founder's network(s). 

Angel investors frequently enjoy a hands-on role in developing a company from the ground up. When an angel investor contributes less than $1 million, the funds are typically in the form of a loan. 

angel investor

The unwillingness of financial institutions and venture capitalists to take on significant risks can solve the problem of attracting sufficient seed money for the entrepreneur. 

An angel investor usually prefers seed equity and becomes a co-owner of the startup and the holder of preferred stock when contributing more than $1 million. 

Seed capital is typically used to develop a business idea to the point where it can be effectively presented to venture capital firms with large sums of money to invest.

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Types of Seed Financing

Startups can get off the ground and survive with a quick cash injection. However, remember that a startup frequently competes with established, profitable companies that have capital on hand.

The term seed implies that this is a very early investment intended to support the business until it can generate its cash or until it is ready for additional investment. Friends and family funding, seed venture capital funds, angel funding, and crowdfunding are all options for seed money.

types of seed investing

Following are some of the common ways of raising seed funding:

1. Friends & Family:

Friends and family are one of the most common sources of seed funding. This often takes a similar approach to the funnel discussed above but is likely less intensive because the founder already has a relationship with this group. 

Remember that the founder is investing their money in a high-risk asset class, and they should be aware of this fact.

2. Crowdfunding:

Crowdfunding is another type of "seed funding" that is becoming more popular. Startups can raise equity rounds from individuals through sites like Republic and StartEngine, with check sizes as small as $100.

3. Incubators:

A startup incubator is a collaborative program that helps new businesses succeed. 

Incubators assist entrepreneurs in overcoming some of the challenges of operating a startup by providing workspace, seed funding, mentoring, and training. 

A startup incubator's sole purpose is to assist entrepreneurs in growing their businesses.

4. Accelerators:

Private startup accelerators provide funding, which assists in covering early-stage business expenses as well as travel and living expenses for the three-month residency at in-person startup accelerators. However, the funds and advice come at a cost. 

Signing an accelerator agreement, like any other form of equity funding, usually entails giving up a portion of the company. Startup accelerators typically take between 5% and 10% of the equity in exchange for training and a small amount of funding.

accelerators

5. Angel Investors:

Angel investors are an excellent place to begin for any founder. Angel investors are professionals, promoters, HNIs, etc., who invest in businesses that are in their initial stages.

6. Corporate Seed Funding:

Corporate venture arms and funds are a newer type of seed funding. Corporate venture funds have become popular as large corporations continue to seek innovation and new revenue streams.

Corporations typically collaborate with seasoned venture capitalists to deploy capital across seed-stage companies that align with the company's thesis or growth plans.

Difference between Seed Round and Series A

The next step in a company's funding lifecycle is Series A funding. A seed round is the first round of capital invested in a business, and a "Series A" is the next round of capital.

Stock options are typically sold to the company's founders, those close to them, and angel investors when the company is first founded. Following that, preferred stock in the form of a Series A can be sold to investors. 

paper money

Series A allows investors to get into a company with a strong belief early. It's a win-win situation for both the company and future stockholders.

When a company reaches "Series A," it is likely to achieve product-market fit and is ready to scale to $1 million or more in revenue. 

At the Series A stage, you should have solid revenue and a scalable plan to bring on more customers and revenue, whereas, at the seed stage, you should have little to no income.

A seed round is used to exemplify that the product, service, or team has the potential to capture a market. A collection round is used to scale the product, service, or group in the market to attack and scale.

How to raise Seed Fund

Successfully raising a seed round involves a capital-raising system and process. The same way you approach your sales and marketing funnels, you should close your fundraising efforts similarly.

One like to think of fundraising in terms of a traditional sales and marketing funnel for a B2B enterprise business. A conventional sales and marketing process can be simplified into three steps:

  • Continually attracting and adding qualified leads to the top of the funnel.
  • Nurturing and guiding leads through the funnel to convert them to customers.
  • Serving customers and providing an exceptional experience until they become evangelists or promoters

funding round

A fundraising funnel can be formed in the same way as:

  • Getting qualified potential investors to the top of the funnel. These investors are typically attracted through cold outreach, warm introductions, or inbound interest. One should ensure that these correspond to the "ideal investor persona" regarding sector, stage, geography, check size, etc.
  • Bringing in new investors and moving them through the funnel. While one may not actively seek new investors or capital, one should always be working at the top of the funnel. 
  • Keeping potential investors' minds fresh Using traditional marketing tactics 365 days a year will pay dividends when it comes time to pull the trigger on a new round of capital.
  • Relationship building and communication with current investors. Customer success is critical to retaining customers once they have reached the bottom of the funnel. The same is true for the investor funnel. 
  • Current investors are one of the first places a founder should look for capital. The existing investors will be among the first to seek advice from a new investor. Finally, current investors should be the ultimate evangelists for one's company.

The right time to raise Seed Round

Raising seed funding for a startup can be difficult. First and foremost, seed investors should be approached when a person believes the company has a strong enough product, market, or team to build a venture-backed company. 

This means one can scale and grow the company to the point where an investor can generate a solid return on investment.

right time

Founders should raise funds once they have determined the market opportunity and who the customer is, and when they have delivered a product that meets their needs and is being adopted at an unusually rapid rate. How fast is it interesting? 

This varies, but a weekly rate of 10% for several weeks is impressive. And to raise funds, founders must impress. Congratulations to founders who can persuade investors without these things.

The fundraising process should likely begin if a person believes the company has what it takes to generate massive returns for an investor.

Preparing Pitch

Fundraising is a systematic process. Founders can use tools and resources along the way to help them tell their stories more effectively. The pitch deck is one of these tools. Pitch decks are an effective tool for telling their story. However, pitch decks will be viewed differently by different investors. 

Some investors may prefer to receive them before a meeting, while others may choose to receive them only via PDF or link, and still, others may not care if one has a pitch deck at all.

Finally, a pitch deck is about the content that a person is sharing.

preparing pitch

There is no one-size-fits-all pitch deck template that will work for every startup, but there are a few things that investors typically want and expect to see in a pitch deck:

  • Concise and Compelling - one wants your pitch deck to provide investors with the information they require clearly and concisely. This includes both the problem and the solution.
  • The Market - Investors want to know about the operational market and why the company has a chance to capture a large portion of it and grow into a large company.
  • Acquisition Model - The acquisition model should work in tandem with the market. Founders must show investors they have a clear and scalable strategy for attracting new customers.
  • Financial projections - Some investors will want to see financial projections, while others may not care at the seed stage because they are frequently incorrect.
  • Traction - While it may be limited at the seed stage, investors are interested in seeing what a company has done so far.
Key Takeaways

  • Seed capital is money raised to develop a business or new product idea.
  • This funding typically only covers the costs of developing a proposal.
  • After obtaining seed funding, startups may approach venture capitalists for additional financing.
  • Some seed capital may come from angel investors, who are high-net-worth individuals.
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Researched and  authored by Kavya Sharma | LinkedIn

Reviewed and Edited by Aditya Salunke I LinkedIn

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