With reference to startups and startup funding, the people especially, the budding entrepreneurs are getting too hyper about what is seed funding? . Seed funding, as observed by all, is the first step towards acquiring funds from the outside for startups. In the past, entrepreneurs have relied on external funding to launch their ventures, if they hadn’t raised pre-seed funding. As the foundation of the startup, it is an essential stage in its lifecycle. A strong foundation allows for greater success.
So, let me share the light on what the chaos is about and how you can make the best of it.
What is Seed Funding?
An early investment that helps a business grow and generate assets on its own is called seed funding or seed stage funding. Investors receive equity stakes in return for their capital investment, which is also known as seed money or seed capital. Founders can use their savings to start a business and use that money as seed money to fund it. This is known as bootstrapping.
How important is Seed Funding?
Starting and growing a new business is not an easy task for most entrepreneurs. With capital constraints, it becomes even more challenging. Starting a business before it generates revenue requires seed funding. For startups and small businesses, it is an effective solution since it provides entrepreneurs with much-needed funding in the early stages of their business.
Costs can include everything from infrastructure costs to marketing and development costs and the cost of hiring new employees. A business can only succeed with investment, and seed funding is the first drop of that investment. Not having seed money is one of the main causes of failure because seed money becomes a valuable cash reserve or working capital.
Seed funding is also important for the following reasons:
- Provides cover in case of insufficient funds
- Entrepreneurial ventures are less likely to face founder risk
- Creates opportunities to work with strategic partners
- The availability of working capital
- Growth acceleration and scaling up made easier
Types Of Seed Funding For Startups
The first step on the journey to seed funding is to understand different types of investors, because there are multiple sources where one can source funding:
Pioneering with over 500 platforms, crowdfunding has clearly begun to reign seed funding. Anyone can back projects, ideas, or products on crowdfunding platforms since they are usually open to everyone.
Corporate seed funds:
Startups have enormous visibility through this type of funding. Seed money is regularly provided by companies like Apple, Google, and Intel. The primary motivation for investments in startups is that big companies see them as potential future profit-makers, intellectual property, or talent.
Small seed investments are usually made by incubators, and they offer services such as office space and management training. Startups that participate in incubation programs do not give up equity, but they do receive more than just funding.
Rather than supporting and nurturing early-stage innovation, accelerators are more focused on scaling up startups. Besides providing seed capital, accelerators offer professional services, networking opportunities, mentoring, and workspace to startups. Because most accelerators are privately funded, unlike most incubators, they accept equity.
Individuals who offer angel investment capital in exchange for equity ownership or convertible debt can be called angel investors. In the early stages of a startup, when the likelihood of failure is relatively high, angel investors provide capital.
Founders may provide seed funding by putting their own savings and wealth to work. The founders are not required to return the borrowed money, but there are additional financial pressures.
The majority of debt comes from money borrowed from family and friends or taken out as loans from banks. Angel investors and venture capitalists are also sometimes willing to provide loans instead of equity investments to ventures in sectors where cashburn is high but traction is also high.
As a company grows, and when it reaches certain milestones, including sales and revenue targets, these investments change from loans into equity or shares.
The major aim of venture investing is to provide funding based on many factors, including the company’s growth potential, the market conditions, the founder’s vision, or its execution. The investors take a stake in the startup company in exchange for the funding. If the startup manages to reach those rounds of funding, VCs typically participate in multiple rounds of investment.
Angel Funds or Angel Networks
During some early stage financing rounds, investors form angel networks or groups and each invests a small amount.
How To Raise Seed Funding?
How to get seed funding for a startup has a few steps which founders need to follow. A founder or entrepreneur needs to research the investor market and find an investor active in the sector they operate in in order to get the best investment in terms of amount and investor relations.
A startup should also have all the paperwork and bank details that they will need to complete the transaction. In order to impress a potential investor, you have to deliver a great pitch. All the necessary information that the investor would be interested in knowing should be included in the document. All projected data should be included in the pitch along with justification. Investors will proceed to negotiations if the numbers appear impressive and realistic. This is an excellent way for startups to raise seed capital in India and abroad.
Related Article: Top 5 Effective Startup Funding Stages