Startups can run their operations using money from friends and families but that’s neither a sustainable option nor an ambitious approach. Even if a founder manages the bare minimum to start a business, there’s a lot more they need to do to keep it running. There are costs of expansive market research and product development. Good entrepreneurship is about exploring a business idea and transforming it into a viable model to offer the best or unique products and services. A scarcity of capital can cause a breakdown and kill the potential of a great business idea to blossom. That’s where seed funding comes in.
What Is Seed Funding?
Seed funding is funding a business at the initial stages of its life cycle. It could be during ideation and planning or when a prototype is ready or even during the trial phase with negligible customers. A venture capitalist is usually a seed investor who invests money after ascertaining a startup’s potential. They invest equity because a seed-stage startup is unsuitable for debts, with the risk to make huge profits or lose it all. In return, they could get a stake in the business, decision-making rights or the right to raise equity in the future. Organizations and individuals involved in seed round funding often have in-depth vertical knowledge of a startup’s business and the necessary resources to assess the potential of an entrepreneur.
What is Seed Capital?
Seed capital is the money or funds that an organization raises to run its operations. A seed-stage startup looks for investors at the earliest stages of its inception to generate enough seed capital to first get the operations up and running and then look to expand the business by strengthening and improving the model.
Difference Between Seed Financing And Angel Investing
The difference between the meaning of seed funding and angel investing often gets blurry as people use them interchangeably. But to simplify it, angel investing happens at the earliest stages when a business has no traction, whereas seed financing or funding is when investors start investing based on the potential of the business when it gains some attention.
Importance Of Seed Investment
Here’s why seed investment proves to be useful for startups:
- It reduces the risk that a new venture poses on the founder
- Seed investment primarily covers insufficient funds that may halt operations and acts as the main source of the working capital
- There’s a huge scope of expanding the business by building strong and reliable relationships with strategic partners
- It acts as a means to increase business scalability and accelerate growth
Investors look at long-term strategy, so an organization showing the potential to monetize a user base over the long term is bound to bring in seed funding from venture capitalists.
Types Of Seed Funding
Here are some well-known types of seed funding:
It’s become a popular form of funding with more crowdfunding platforms becoming trendy destinations for businesses to seek capital. These platforms generally allow anyone to invest in an idea, product or concept.
Angel investors invest seed funds in startups at the earliest stages in return for convertible debt or equity ownership or in some cases both.
These are investors who mainly help new businesses scale up instead of helping them innovate in the early stages. They even extend help through training, mentoring and opening up networking opportunities. They usually take equity in return.
Incubators provide funds, training and office spaces. Their transaction doesn’t usually involve equity holdings.
These are high-end investors who thoroughly examine various parameters such as vision, potential for growth and market conditions before investing in a new venture.
Corporate Seed Funding
Big corporate investors act as a good source of funds along with providing more exposure to a business. Brands like Apple, Intel and Google regularly support startups to build their brand and capitalize on ventures with high potential.
Knowing the right time and way to raise seed funds is essential for attracting and impressing investors. Startups need to study the market before launching campaigns to understand if the model is sustainable. Customer profiling is an important factor when it comes to convincing investors. They need to know the target audience and the scope of value addition. Most importantly, product development is key, whether to convince people to buy it or reassure investors to bet on it.
How To Raise Seed Funding
To generate seed funding for startups, it’s imperative to have a grip over financial management and a clear cash flow statement along with a creative business idea. A startup seeking seed investment should be well prepared with a structured business plan with clearly defined market potential, financial projections, target market and potential competition. Seed funding for startups follows a chain of rounds that adhere to guidelines and metrics of entrepreneurship and investment. Let’s check out the stages:
Pre-seed funding is when a business is introduced to funds for the first time. It’s the earliest stage of funding in an organization—so early in the process that it’s mostly not considered significant enough to be included in the rounds of funding and neither are the funds considered as seed capital. This period sees the organization’s founders getting operations off the ground for the first time. Pre-seed funding can come from family, friends, supporters or even the founder themselves.
This is officially the first stage of seed funding for startups and the money raised is the first official seed capital of the organizations. It must be considered the first step of planting a tree—sowing the seed. The seed may not need much care and grow to become a strong tree or it may need nurturing and regular care to make it bear fruit. It’s the same with this process. Few startups don’t need to look beyond this stage for seed capital as their business models hit big and reap immediate high profits. For others, there are three main series funding stages that follow in order:
Series A Funding
After making it past the previous seed stage, the organization gains some traction in fields such as revenue, views or number of users. With Series A funding, they’ll reach the next level. It’s the first venture capital funding for an organization. An organization is required to be ready with a plan to develop a stable business model that can increase revenue by using the money raised as funds. Investment lies between $2 million to $15 million. This round witnesses ideas being backed by numbers. Google Ventures is a popular seed investor in this round along with names like Intel Capital, IDG Capital and Index Ventures.
Series B Funding
When the products or services start fitting perfectly with the market, organizations look to raise their level to seek further funding. With Series B funding, organizations deal with big numbers and look to significantly grow their bases. Expansion at this seed-stage means acquiring more customers and growing the team to serve a bigger customer base. Organizations can expect to be valued in the range of $30 million to $60 million. Venture capital organizations behind Series B funding usually include names like Google Ventures, New Enterprise Associates, General Catalyst Partners and Kleiner Perkins Caufield & Byers. Due to the new valuation of the startup, investors reinvest to make sure they retain their share of the pie in a promising venture.
Series C Funding
The Series C round is when an organization or startup is doing well in the industry. It’s ready to develop new products, acquire other businesses and expand into new markets. Organizations may even be looking to take their products global or raise their value before an acquisition or Initial Public Offering (IPO). Organizations can raise around $25 million and be valued between $100 million and $120 million, if not more. Organizations are not valued based on definitive data points and not on projected data, intuitions or expectations. Venture capitalists managing hedge funds, banks and private equity are the usual seed investors in this round.
Series D Funding
Usually, a successful organization doesn’t have to look beyond the initial seed round funding of the three stages. The Series D after the seed stage is complicated and may or may not be a sign of positive things to come. An organization may choose this funding after discovering new opportunities to expand before going for an IPO or to stay private for longer. Quite often that’s not the case. Organizations seek funding in this round when they fail to meet expectations. They have devalued stocks, low employee morale and bad credibility.
Executives have to learn to choose appropriate methods to generate seed funds that‘ll help them boost their businesses as well as rise in an organization. Commercial awareness is a key aspect in that pursuit, which is backed by intelligence, drive and a business-savvy approach. With that in mind, Harappa brings the Commercial Acumen pathway that’s designed to train individuals to monetize the best products and services in the industry. Learn to make astute financial decisions with confidence to better manage resources and add value to the business. Our faculty will teach you methods like the Good-Cheap-Fast rule, the art of negotiations and ways to avoid common negotiation mistakes. Join today if you want to effortlessly learn to mitigate the subtle effects of one’s implicit biases on behavior.