If your business has built a small team, started earning revenues, and things seem to be taking shape, it’s time to push your dreams further and raise capital. The first round of financing raised by a startup is typically called the seed round. Raising seed money is one of the most important stages in the lifecycle of a startup as it lays the foundation, the stronger the foundation, the further your company will go.
If you’re interested in learning more about seed capital & how to raise it for your startup – this blog is just for you. Read on!
What Exactly Is Seed Funding & Why Is It Important?
Seed funding, also known as seed money or seed capital, is an initial investment of capital in a startup in exchange for equity. Seed money provides the initial boost that is necessary for business growth and ultimately better cash flow.
Why Seed Funding Matters?
Prior to seed funding, a startup is typically in its infancy stage and its product/services is available to limited users in the form of MVP or beta version. Seed money gives the startup the capital that enables it to scale and therefore function like a full-fledged business. There are several other reasons why seed money is crucial:
- It acts as working capital – Seed funding acts as the initial working capital that can cover the issue of insufficient funds to run and scale the business. It can provide the monetary needed to support inventory, marketing and employee costs.
- Adds to business expertise – Apart from money, the best seed investors bring expertise given their vast experience working with startups across industries. They could be a sounding board that acts as a catalyst for growth in early years.
- Gives a competitive edge – Raising seed capital provides financial leverage to startups, this can be utilized to acquire new customers, grab new opportunities, move fast and gain a competitive edge in the market.
When Should You Start Raising Seed Funds?
The timing associated with raising seed capital can determine the long-term success of your startup. The right time to raise seed capital is once certain conditions have been met, these include:
- There is a minimum viable product (MVP) – A MVP is the basic version of a new product that can be or has been launched in the market. If you can establish product-market fit and prove that your idea has potential, you might want to start raising seed capital to develop the product further.
- You have a few paying customers – You should raise seed money if you have figured out a market opportunity, have clarity on your target segment, and have delivered a product that matches their needs. You should have a few customers that are willingly paying for your offerings as-well.
- A robust business plan that is scalable – Once you have the MVP, have established product-market fit, and have a few paying customers, you should work on developing a solid business plan with a roadmap for scaling your business. Depending on your business plan, you should develop an idea of how much you want to raise for getting to the next scale.
Only once you are confident about all of the aforementioned points, should you start thinking about raising seed funding.
Seed Funding Sources
As you start thinking of raising seed capital, the first step is to understand the different types of sources or investors you can choose from:
Crowdfunding – Crowdfunding platforms have become one of the most popular choices for seed funding today. They are open to everybody and anybody can chose to back your startup. For instance, crowdfunding platforms such as AngelList and Kickstarter have turned out to be great launchpads for startups looking for seed money.
Angel investors – “Angels” are high net worth professionals that offer seed capital to startups in exchange for equity or convertible debt. They are called “angels” since they invest in startups when the risk of failure is fairly high i.e. during the initial stage.
“Finding angel investors can be a daunting task, so to make things easier for you; here is the list of top angel investors in India.”
- Friends and family – Your close ones could also be one of your sources for raising seed money. They invest in you – the person they have known for long – and your ideas. Usually, startups treat this as a loan they repay, with or without interest.
- Accelerators & incubators – Both accelerators and incubators support startups by providing small seed investments along with workspace, mentorship, and networking opportunities. Their aim is to support them in a way so that they can work in a focused manner in collaboration with like-minded professionals.
- Corporate seed funding – This, again, is a great source of funding for startups. Companies such as Google and Intel nurture startups to facilitate innovations that are in line with their vision. The primary motivation of investment in startups for these tech giants is that they see them as a source of profit and talent. For instance, GV is the investment arm of Alphabet (Google’s parent company).
- Micro VCs – While many large VC firms have started seed stage investments, usually micro VCs are more active in this space. Exactly as it sounds, micro VCs are smaller versions of traditional VCs that invest in early stage startups.
What (Angel) Investors Look At As They Make Seed Funding Decisions
Seed funding is not just about the growth of your startup but can also be a source of validation for your startup. Therefore, make sure you have the following things in place as you approach angel investors for seed funding:
- An enticing pitch deck – The purpose of a pitch deck is to get the attention of the investors and draw them to talk to you. Therefore, you should have a proper business pitch deck, explaining to them about your vision, product or service, market opportunity, target audience, and also how much money would you need to get to the next stage. Make sure you give the inventors enough data and information that encourages them to speak to you or your team. Also, design and presentation is very important as it reflects how you think about your business as a whole. So, use visuals such as pie charts, infographics, videos, etc. to get your message across well.
- A functional prototype – Having a functional prototype is important. This gives investors confidence in your execution capabilities, gives them a better understanding of what you want to do, and enables them to benchmark you against your competitors. Going to meet an angel investor without a working prototype reduces your chances of getting seed capital.
- A committed team – Before angel investors fund your startup, they will want to ensure that your company is ready for growth. One of the best signs that your company is ready to receive seed funding is when you have the right people in place. Angel investors generally like to interact with the founder’s team members to assess their potential and also check your ability to hire well.
- Scalability plan of your business – The scalability factor excites investors. A typical investor would be interested in investing money in your firm if they see that it has the potential to achieve exponential growth. Knowing your growth projections, a concrete plan to achieve the same and metrics you are going to track builds investor confidence.
Challenges You Might Face While Raising Seed Capital
- It’s a stressful, time-consuming process – While getting a “yes” from an angel investor can take 6 months, sometimes a “no” can take up to a year. There are times when companies go broke when founders are trying to raise funding.
- You have to be transparent – As the investors get equity, you might have to be open with your investors about your business plan, how much of the company you own, what its shortcomings are, your corporate financial statements, and more.
- Finding the right advisors is not easy – You will have to be selective about using the right advisors when you are raising capital for your business. They have to be experienced and knowledgeable to advise you on the right amount of capital to be raised for your company’s growth, etc.
- Finding investors that offer more than money is difficult – Finding investors that have experience in the industry, contacts with potential customers, and a good reputation is equally important as the funding you get. It is not easy to find and onboard such investors.
- It’s an endless search – You have to keep looking for investors even if one is interested. You never know when a deal might fall through. Therefore, never end the hard work of finding other investors.
There’s No Rush!
Usually, businesses with an MVP or just an idea end up giving away a substantial share of business ownership in the form of equity while raising seed capital. This further limits their future profits. To ensure that there is no interference from investors and startups don’t have to dilute their equity, organizations at a growth stage are increasingly adopting revenue-based financing via investors like Velocity.
Velocity offers a fast, flexible, and non-dilutive alternative to typical funding options such as banks and VCs. Businesses with healthy revenue streams can get instant funds and can make the repayments as their revenue grows. It’s as simple as that. To know more about how it works, check out our website.