Seed funding, also known as seed capital, is the initial funds provided to a startup to kickstart its business and support its operations.
It’s the first major investment received by a company at its early stage. Seed funding owes its inception to the denial of funds to startups or small businesses by banks and potential investors due to a lack of previous proof of success.
Because of the refusal of banks and investors to provide funds, startup executives turn to people they know for funds and investments. It doesn’t have to be huge but must be tangible enough to get them started with their operations.
Types of Seed Funding
- Friends and family: Startups or early-stage companies often generate capital from family and friends. This type of seed funding is informal and based on personal relationships.
- Crowdfunding: Seed funding can be generated through crowdfunding. Crowdfunding involves seeking capital from a large group of people typically through the internet. The company executive provides a business idea on a renowned platform and waits for people who see value in such an idea to invest in the project. Funds can also be solicited through campaigns aimed at convincing potential investors to buy into the idea.
- Angel investors: They are also known as private investors. An angel investor is a wealthy individual who provides private funds, also known as seed funding, for small businesses or startups. This is usually in exchange for some part of the company’s profits or shares.
- Venture capital firms: Venture capitalists are also private investors but in a more technical way. They are private investors with high net worth that provide huge capital for startups as a form of investment. In return, they demand a part of the company’s equity stake. They make higher investments when compared to angel investors and have higher expectations from startups they’re willing to invest in.
Benefits of Seed Funding
- Financial support: Seed funding provides financial support to startups or companies in their early stage. Capital is an important determinant of the success of any business. Thus, seed funding provides entrepreneurs with the necessary resources to realise their business idea. With seed funding, they’re able to do product development, market research, hiring personnel, and marketing costs.
- Idea validation: Angel investors and venture capitalists only provide seed funding for companies with potential or valuable business ideas. Thus, investment by these people helps an entrepreneur validate his ideas and shows there’s potential for growth and success of his business.
- Expert advice: Alongside seed funding, investors also bring valuable ideas and advice that can further enhance business growth to the table. Based on their knowledge, they can provide better ways to break market barriers and promote products. They can also connect startup businesses with potential partners, customers, or suppliers.
- Business growth: Seed funding is an essential step in kickstarting a startup and once it’s successful, it brings further growth and development to the business. Once a business expands, it starts attracting more clients and investors interested in providing more capital for the business to run.
- Increased credibility: Seed funding from renowned investors can improve a company’s reputation and hence attract investors and clients. Investment by renowned angel investors, venture capitalists, and other private individuals can be a form of promotion of business. This leads individuals into believing that proper risk analysis was done and such a startup can be trusted.
How to Secure Seed Funding
Getting seed funding from potential investors often involves several steps. Here’s a step-by-step guide to help you land your next investor.
- Define your business ideas: To attract investors you need a juicy business idea. Not only must the business idea be juicy, it must also be realistic and well-drafted in a way that the investors are convinced to give capital. Prepare a proper business plan that highlights the target market, growth market, market potential, and a team of experienced experts for the implementation. Your main aim is to show them how the seed funding will be utilised to generate profits and enhance business growth.
- Choose a funding source: After preparing a proper business proposal to attract potential investors, it becomes important to determine the kind of investors you’re trying to attract. Investors include angel investors, venture capitalists, family and friends, crowdfunding, and accelerators. It’s essential to weigh the pros and cons of each type of seed funding before choosing which is most suitable for a startup.
- Estimated seed funding: The next important question is usually how much you would need to kickstart your startup. Calculate the necessary expenses that will be presented to the investors. Investors aren’t interested in rough estimates, they need an exact required value.
- Prepare a pitch deck: Develop a concise and well-planned pitch deck that effectively communicates your company’s vision, long-term goals, type of product, problems the product aims to solve, why the timing is right, market value, and business competitive advantage.
- Create a list of potential investors: To obtain seed funding, you’d need to reach out to a lot of investors. Create a list of investors who match your desired criteria, then narrow them down to those who are more likely to provide seed funds for your startup. You can contact these investors through cold emails or other networking platforms.
- Negotiations: This is the last step to securing seed funding. Once you’ve attracted potential Investors, it becomes important to discuss the terms of the funding to make it official. Discuss the amount of funding, equity stake, valuation, and any other clarity the investor may seek. Also, remember to consult legal professionals to formalise such agreements and proper understanding of the terms of such contracts.
Disadvantages of Seed Funding
- Seed funding requires having to part with a part of the company as investors often demand equitable stakes such as shares.
- There might be undue pressure for business growth from investors who may threaten to withdraw funds should there be a downside.
- Investors also become involved in every important decision-making process of the startup.
Seed funding serves as a crucial catalyst for startup success, providing the necessary resources, validation, and guidance for growth. Understanding the advantages, disadvantages, and risks associated with seed funding is essential for entrepreneurs embarking on this funding journey.