Seed Funding For Startups: All your questions answered
If you’re a startup looking to raise your first seed funding, the ocean of information available on the internet can seem daunting. To make it easier, we at Velocity have come up with the ultimate seed funding for startups faqs, where we answer all your burning questions on getting funded. Read along.
How does seed funding for startups work?
If you’re looking for seed funding, you already know that it is the funds raised by a business at the earliest stage of its life cycle. That is, it is the money that helps a startup get off the ground and get started. Ideally, the startup owners approach different sources of seed funding, who invest in the startup in return for equity in the business. However, one must remember that it is not always that the investors seek equity directly. These can also be taken in the form of convertible debts and simple agreement for Future Equity, which would be converted into equity once the startup matures.
We have written an extensive blog on “seed funding” to help you better prepare for your first official round of venture capital funding. Read along to know how you can prepare for seed funding.
How difficult is it to get seed funding?
Getting seed funding can be an exhausting process, especially since most of the startup founders do not have funding experience. It involves months of research and hours clocked in to ensure you get the right partners to invest in your business. However, knowing the basics and understanding the legalities can help make the process easier.
When should I raise seed funding for my startup?
Timing is vital when raising seed funding for startups. Raising too early can make you look irrelevant, while raising too late means more competition. Ideally, if your answer to the below questions is “Yes,” you are ready to get seed funding for your startup:
- Do I have a unique idea that stands out in the industry?
- Is there a demand for the product I am building in the market?
- Do I have data to showcase the adoption rate of the product?
- Do I have a business plan in hand?
- Is my solution scalable in the current market?
- Do I have a list of potential investors?
Ideally, you should raise seed funding if you have at least 1000 customers, and have under 2-3 cr in revenue, and are looking to increase your customers and reach out to them through multiple channels. That way, capital is invested equally into inventory, distribution, and marketing.
Want to know how pre-seed funding differs from seed funding round, read our detailed blog here.
How much seed funding should I raise for my startup?
The simple answer to this would be, “As much as you want.” Yes, you can raise all the money you need to get started. However, we suggest going about this strategically. It would also be helpful to draft multiple plans that highlight the different amounts that could be raised and the various possibilities with respect to equity dilution, profitability, etc. This way, you can round in on an amount that would help you grow rapidly while also not becoming a burden. Ideally, you should try to obtain enough capital to take your business to a stage of profitability.
What are the sources of seed funding for startups?
There are multiple sources of seed funding for startups available today. Some of the most prominent ones are:
- Friends and family
- Angel Investors
- Corporate seed funds
How long does it take to get seed funding for startups?
Raising seed funding for a startup with no prior funding whatsoever can take up to three to nine months (sometimes more) from the initial pitch to having money in the bank. This period consists of a lot of research, legalities, negotiations, and more. We suggest perfecting your pitch, finding the right investors, and having all documents ready beforehand to ensure quick seed funding for your startup.
How long should seed funding last?
Ideally, you should plan to raise seed funding that can last 12–18 months. After that, typically, you will be on the path to getting the next round of funding. Ensure you neither overestimate nor underestimate the funding you’d require for your startup. Draw up a business plan and a roadmap to ascertain how much you’d need to run for 12–18 months.
Is seed money an income or a loan?
The answer to this depends on the kind of seed funding ROI you promise your investor. While some investors go for equity funding straight away (in the case of priced seed funding), many others look for convertible debt or a Simple Agreement for Future Equity (SAFE) (in the case of unpriced seed funding). Convertible debts are loans an investor gives to a company that will have a principal amount, an interest rate (usually a minimum rate of 2% or so), and a maturity date. Unlike convertible debt, SAFE is a loan given in return for the right to purchase stock at a future date, usually at a discounted rate.
Do I have to give back the seed funding money?
In simple terms, no. You don’t have to give back the seed money per se. However, you will be giving away a part of your business’s equity, which would later be liquidated to ensure the investors get returns on their investment.
How much equity should I give up while raising seed funding for my startup?
Typically, founders give away 10–20% of the equity during the seed funding rounds. However, the chances of this going north are higher depending on the size of the investment, your business’s valuation, the market demand for your product, and more. Anything above 20% can put you in a tricky situation. These days most businesses are moving towards founder-friendly alternative ways of financing like revenue-based business loans where they get the capital without losing any equity.
How much return do investors expect after giving seed funding for startups?
Generally, investors look to make profits in 5-8 years and have an annualized internal rate of return of 20–40%. However, it all depends on how the company grows— that’s why angel investors and venture capitalists invest in many companies to hedge their risk.
How do seed funding investors make money?
Seed funding investors make money by selling off their stake in the business when it reaches the liquidation stage. Usually, this happens via Initial Public Offerings (IPO) or in the secondary market. They also make money by selling their shares to the business owners themselves. One other way in which investors make money is when the startup is merged or acquired by a bigger company.
How can I protect my IP rights?
It is natural to fear your ideas being stolen. Filing patents, trademarks, and design applications are the most potent forms of securing IP and ensuring that your IP is not copied by someone else. Another route to take would be getting all stakeholders to sign a NDA (Non Disclosure Agreement), even during the pitching stage.
What happens if a startup fails after raising a seed round?
When investing in a startup, investors are very well aware of the risk involved. However, the chances of startups failing is high. What happens then is that the investors lose the money they have invested. The startup founders do not have to repay the amount.
Where can I find investors to raise seed funding for startups?
Finding the right investor is key to growing your business as they would be involved in your operations for a long haul. While you can find lists of investors online, we recommend doing your own research and curating a list of your own to ensure the values and interests of your potential investors align with yours. Additionally, some of the most common places you can come across potential investors are Linkedin, networking events (Investor Series @ Lounge 47, Investor events a@ BHive, Bootstrap at Breakfast, and events by the Indian Angel Network, Startup Growth Networking Meetup, India Fund Fest, etc), through mutual contacts, crowdfunding websites, etc.
Bonus: We have curated a list of top 40 venture capital firms in India to get you started.
Where can I find angel investors in India?
Angel investors are high net-worth individuals who look for investing opportunities in startups in exchange for equity in the business. You can reach out to angel networks such as Indian Angel Network, Mumbai Angels, Lead Angels, Chennai Angels, etc. or even sites like Crunchbase for a list of angel investors. To make it easier for you, we have curated a list of top angel investors in India, which you can access here.
Can I approach multiple investors to raise seed funding for my startup?
Yes, please! It would be foolish to stick to convincing just one investor. We recommend drawing up a list of potential investors and approaching them all. This way, even if some of them do not seem interested in your idea, you would still have the other investors to partner with.
Should I be fierce in my approach to raising seed funding?
While investors love formidable founders, there is a very thin line between confidence and arrogance. It is always important to be humble yet confident while talking to potential investors. Do not over-promise in your bid to raise seed funding for your startup. Ensure you take in all suggestions when the potential talks about your idea. This can come in handy in improving your product. Remember, word of mouth is a great way to spread awareness in tightly-knit networks, and how you react and respond is vital to ensuring a good image in the network.
What documents do I need to raise seed funding for my startup?
The two most important documents you’d need to raise seed funding for your startup are the business plan and the pitch deck. The business plan is of the most significance as it outlines the what, why, and how of your business. It is a great way to convince your potential investors. Here’s how you can draft a business plan that would work. A pitch deck is what you’d be showing your potential investors during the very crucial meetings you’d hold. We recommend having a minimalistic deck that isn’t text-heavy. Graphs and numbers are great ways to convince investors. In a nutshell, the deck should contain your vision, value proposition, market analysis, competitor analysis, product roadmap, etc.
How to get funding for startup from the government?
The government of India, under its Startup India initiative, has launched the Startup India Seed Fund Scheme (SISFS). It provides financial assistance to startups for proof of concept, prototype development, product trials, market-entry, and commercialization. The Seed Fund will be disbursed to eligible startups through eligible incubators across India. A startup, recognized by DPIIT, incorporated not more than 2 years ago at the time of application, is invited to apply for the scheme. Stay tuned to our blog for more.
How do I set the valuation for my startup?
One of the deciding factors for investors to fund your startup is your startup valuation. It is important to determine your startup’s valuation to decide how much equity you will have to give to your investors in exchange for funds. While the value of a startup in the early stage would be close to zero, what investors look for is the growth potential and scalability. Some factors that are considered during the valuation are the traction of the business, your image in the industry, whether you have a prototype, the pre-valuation revenue if any, and the industry you’re getting into. Leveraging the expertise of your legal and finance teams would be highly beneficial here.
What are the factors to consider while negotiating during the seed funding round?
Negotiation is an art and is key to securing seed funding for your startup. Always be prepared when you meet an investor. Knowing your business plan inside out is a great place to begin with. Be open to reasonable negotiations. If you’re not sure if the deal is good, request some time to talk to your team and get back. Be mindful of how you speak. While confidence is great, overconfidence can be off-putting. Before even getting to the negotiating stage, remember to research your investors thoroughly. Knowing their investing history, their interests, etc, can come in handy during negotiations. The better you are in negotiation, the more equity you might keep for your company.
How does my seed funding round affect the future funding?
A successful seed funding round means more capital for your startup to kick off. However, with each round of funding, new shares are issued. This means the percent ownership of all existing shareholders will be diluted. Nonetheless, a triumphant seed funding round also helps build awareness among the investors’ network. It helps you get recognized, and also comes in handy when raising the next funding rounds.
Is there any other source of funding that does not involve giving away equity?
Yes, there is another source of funding that does not involve giving away your equity. If you are looking for a flexible, highly scalable, 100% digital process of raising funds that requires no equity dilution or any guarantee, we recommend revenue-based financing. This founder-friendly approach lets founders raise funds without diluting equity or providing collateral, and the repayments happen as a percentage of monthly revenue. You can learn more about revenue-based financing in our blog here.
We, at Velocity, believe financial literacy is what differentiates a highly successful entrepreneur from a mediocre one. Stay tuned to our blog posts to understand more about the different kinds of funding available for your startup in India, the best way to go about them, and more. Here are some additional materials to help you in your journey to get funding for your startup: