Startups need investment to transform their ideas into marketable products/services.
There are several costs a startup has to incur such as purchasing equipment, renting premises, developing a business plan, conducting market research and recruiting staff.
However, it takes some time for the startup to take off and start generating revenue. Hence they need some funding to meet these initial expenses. Seed funding comes into the picture at this stage.
What is Seed Funding?
Seed funding is also known as seed capital or seed money.
Just like a seed grows into a giant tree, seed funding is the initial capital that aids a startup to transform into a successful business. It is the first capital raised by a startup from external investors.
The investors of the seed funding round include sources close to the founders, angel investors, startup incubators and accelerators, and venture capitalists. They invest funds in the startup in return for equity in the company or a percentage share in the profits.
The risk profile of investing in a startup is high, so the investors get higher equity per sum invested during this stage.
Seed funding is typically obtained when the startup is established and is poised to go into the product development phase. However, to establish the startup, the founders require other type of funds.
Seed Funding Vs Pre Seed Funding
As the name suggests pre-seed funding comes before seed funding. Pre-seed funding is the first capital infusion to the business.
The investors for pre-seed funding are founders themselves and their friends, relatives and supporters. It is different from seed funding in terms of timing, amount, purpose and investors.
| Criterion | Pre-seed funding | Seed funding |
| Timing | Initial stage of the startup | Product development phase |
| Investors | Founders, and their close circle | Founders and their close circle, angel investors, venture capitalists, incubators and accelerators |
| Purpose | To establish the business, obtain necessary licenses and permits, create a proof of concept to prove the viability of the idea, hiring the first team | To fuel the growth of the startup and meet initial expenses such as procuring equipment, renting premises, developing prototypes and MVP, expanding team, conducting market research and creating a business plan |
| Amount | The amount invested in pre seed funding varies from $50,000 to $250,000 | The amount invested in seed funding varies from $500,000 to $ 2 million |
Why do Startups Need Seed Funding?
The amount of funding required for a startup to take off and achieve profitability is huge. In most cases, the founders and their supporters are not able to meet the capital demands of the enterprise.
Seed funding for startups aids entrepreneurs to sustain the growth of the business and attain profitability. Seed capital provides startups with the necessary boost to transform from an idea to a profitable venture.
Raising seed capital for startups is time-consuming and arduous. You have to court several angel investors and venture capitalists to find a suitable investor for the project. It is significant to know when to raise seed funding to make the process smoother.
At What Stage Seed Fund is Raised?
Timing is crucial to achieve success in attracting investors to fund your startup.
Investors require compelling reasons to invest in the business. It is crucial to prove that the idea is viable and has a demand in the market.
To ensure success, you have to approach the investors with a detailed business plan, market research data and a clear roadmap for product development.
You should raise seed funding when the project is ready to go into the product development phase.
How Much Seed Fund to Raise?
The amount of seed funding varies depending on factors such as industry, capital requirement and the size of the startup. You should ideally raise funds that can propel the startup to profitability.
The amount of funding you can raise in the seed funds depends on your credibility, and the equity you are willing to give up in this round. You can give up anywhere between 10 to 25% of the stake at this round.
One way to determine how much seed funding to raise is to determine the months of business operation you wish to fund with the amount.
Once you arrive at an estimate, add a percentage to face unforeseen circumstances.
How do Startups Raise Seed Funding?
Regardless of the amount, it is crucial to improve the profile of your business to capture the interest of potential investors.
Attend investor conferences, be active on social media, and participate in networking events to meet potential investors, who are interested in your industry.
Develop a pitch that conveys the story of your startup and convinces the investors to fund the project.
The pitch should convey to the investors’ important information like why did you start the business, your expertise in the industry, what problems does your product/service address, and the USP of your product.
You must also develop a strong business plan with realistic projections of costs, revenue generations and growth prospects.
Conduct a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis to give a clear picture to the investors about where your product/service fits in the market.
Here is a step by step guide to raising seed funding for a startup.
- Prepare an estimate of the monthly expenditure, and revenues. Consider multiple growth scenarios and prepare an estimate for each scenario.
- Discuss with the stakeholders and team members and get expert opinions from mentors. Use their experience to sharpen your pitch.
- Define the milestones and timelines. It is crucial to give a clear roadmap to the investors and convince them to invest in your startup.
- Meet investors who are knowledgeable and experienced in your industry. Use the 30-10-2 approach to shortlist the right investors for your startup. Introduce your startup to 30 potential investors, 10 out of them might be interested for further discussions, and 2 of them may actually invest in the business. You can repeat the process multiple times until you find the investor.
- Be prepared with answers for questions like how much seed funding you need, how do you plan to use the funding, how much equity you are willing to dilute in the seed funding round, does your startup provide investors with opportunities for active participation in business operations?
- Be flexible in your negotiations. Do not be overly rigid or flexible to ensure that your startup is not underfunded.
Who Provides Seed Funding for Startups?
There are various sources to obtain seed funding for a startup. However, it is critical to approach the sources who are experienced in the field, have the right funding ability, and are easy to work with.
Here are a few of the popular sources to raise startup seed funding-
- Family and Friends – You can approach friends and family to raise seed money for your startup. Most of the time they are ready to invest in your idea and support your entrepreneurial journey. One advantage of taking funds from your close ones is they do not demand any equity or share in profits, in most cases. You can repay the amount once you start generating revenue and attain profitability. However, funding from family and friends may not be sufficient, if your startup requires high capital infusion.
- Crowdfunding – Crowdfunding platforms such as Angellist and Kickstarter aid startups to raise seed money. As the name suggests, you have to list your idea on these platforms and interested members will come forward to offer support.
- Angel Investors – Angel investors are high net worth individuals, who offer seed funding for startups. They invest money in exchange for equity or as convertible debt. These investors are called ‘Angels’ because they invest in new enterprises, where the risks are very high.
- Accelerators and Incubators – Accelerators and incubators support startups by providing seed capital, mentorship and networking opportunities. They usually provide seed money as a loan that can be repaid within a pre-agreed duration. Both accelerators and incubators provide the right environment for new entrepreneurs to collaborate with like-minded people and grow together.
- Venture Capitalists – Venture capitalists also invest in startup projects in exchange for equity. They consider several factors such as the market potential, founders expertise and reputation, growth potential, valuations etc. to offer seed funding for a startup. Venture capitalists also participate in other rounds of funding such as series A, B, C etc. if the founders approach them. Some popular venture capital firms in India are Accel ventures, Sequoia Surge and Axilor Ventures.
Seed funding is the first round of external funding for a startup. Most startups raise seed funding during the product development phase.
Seed funding provides the necessary capital infusion to propel the business to profitability. There are many sources that offer startup seed funding.
Angel investors, venture capitalists, incubators and accelerators, and the close circle of founders are some sources to raise seed capital.
It is critical to choose the right investors to ensure the success of your seed funding round.
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