Seed funding, also known as seed capital, is a small (but not insignificant) amount of money that you may get as an initial investment to help you kickstart your business, support research, or develop a new product.
It is more of an unsecured loan that you might get from an angel investor to fund your startup in exchange for a share of equity in the company. Sometimes getting a loan from a traditional bank might not be a viable idea for many startups. This is why startups in their early stage look for business professionals who can help them build the company and expand operations.
Most startups have a humble beginning. It starts with the founder and a brilliant idea. The founder then goes on to share the vision with friends and family, as well as work day and night to put his or her ideas into action.
After months of hard work, the company starts to see steady growth. It’s getting a lot of attention, and sales are slowly climbing. With a growing client base and interest in the product, it’s time to set the bar high and start expanding the business.
This is when you need financial assistance and advice from people who have helped other businesses turn into million-dollar brands.
What Is Seed Funding?
The easiest analogy for seed funding is planting a tree. You plant the seeds so you can have a full-grown tree. As you take care of that tree it will have strong roots. It will start to grow and eventually, it will bear fruits. Then you can have the sweet fruits or you can sell the tree and plant a hundred more with the money.
It takes time and cares for a tree to grow. You need to nurture it and keep it nourished. Only then you can have the fruits that will grow from years of nurture. Just like that, seed funding helps you with the foundation of your business. Seed funding can help your struggling startup grow into a big profitable multi-million dollar business.
When looking for funding options for your business, it is really important to consider the stage in which your business is currently operating. It is also necessary to know the growth of your company and what do intend to do with the funding. There are many stages of funding and you need to decide the right one to help your business flourish.
When Do You Need Seed Funding?
As the name suggests a Seed funding is basically early-stage funding. You just started your business and you can see steady growth in the near future. But you are running out of cash. So you need outside help to get your business going.
That is when you look for potential investors or angel investors for seed funding. Seed funding, also known as seed capital and seed money, is a type of equity-based funding in which an investor invests capital into a business during its early stages in exchange for an equity stake.
The amount of money the investors will bring to the table will depend on your business projections, pre-money valuation, and your idea. A seed round usually starts from $500k and up to $ 20 million depending on your idea and investors.
How Does Seed Funding work?
During the seed funding, the business owner receives the required capital to fund his or her idea, while the investor acquires partial ownership of the business. It is quite similar to equity funding.
So, when the business succeeds and becomes profitable, the investor can sell his or her shares for a profit and take a sweet exit. It is necessary to get your business up and running.
Seed funding is the best possible way for a business to take the next big steps. It could be a single investor or a group of investors who will help you with your seed funding. It helps you scale your business.
How Seed Funding Can Help Your Business
You can do a lot with this funding starting from hiring, renting space, logistics, and also for research and developments. Investors are typically rewarded with convertible notes, equity, or a preferred stock option in exchange for their investment in your company.
It is the initial stage of your business development. This round of funding will decide the future of your company. You might see exponential growth in your business or might fade out. The best thing about seed funding is, it helps the entrepreneur learn about business on the job.
It helps the founders to fill their knowledge gaps and work with the key player of the industry. When starting out, entrepreneurs have very little knowledge of the startup environment.
This round of funding not only shapes your business but also shapes you for the future. Having experienced investors is as much important as cash itself. There is a lot you can accomplish from the seed funding round.
This is the basic block of business and if done correctly, it will help you raise more money in the future and help your business with a high valuation.
Key Benefits of Raising a Seed Round:
- More time to fine-tune your business model.
- More time to connect with instrumental business partners.
- Supports lower dilution and more capital for future rounds.
- More flexibility to pivot and change course, according to market demand.
Once you are done raising your seed funding you will have the chance to prepare for the next round of funding which is Series A. It is as much important as seed funding and you need to take a lot of things into consideration before going for a Series A.
Types of Seed Funding for Startups?
Seed funding doesn’t always necessarily have to come from angel investors. If you want to get funding for your startup there are other ways you can manage seed funding to get your business operational.
Crowdfunding has become very popular in the startup ecosystem and is one of the easiest ways of raising money for your business. There are hundreds of crowdfunding platforms that provide financial support for small businesses especially startups.
The concept is simple: instead of pitching a single investor, you pitch your business plan to a community of people on the internet and wait for those people to fund your ideas. Oculus Rift and Exploride took are the most notable example of crowdfunding.
A venture capitalist (VC) is a private equity investor who invests in high-growth startups in return for a share of the company’s ownership. They put money in companies that have already established some credibility and have the potential to scale.
VCs are a lot more professional than angel investors and have good financial backings. Venture capitalists often offer more capital than angel investors and in return, they seek more control or stake of the company.
It’s far more difficult to qualify your startup for investment from a venture capitalist than it is to qualify for funding from angel investors. Before investing, VCs frequently examine a startup’s portfolio and growth prospects.
If you believe you have a groundbreaking product that is scalable and have huge growth potential, you will find a lot of big corporations like Apple and Google who would be interested to fund your project and help you out with ideas. These digital goliaths are eager to part with cash if they believe a startup may provide them with profit or talent.
Angle investors, sometimes known as seed investors, are individuals with financial resources and a successful business portfolio who are prepared to invest in new businesses or entrepreneurs in return for a share of the company’s stock. Many startups often fail because they burn too much cash and have problems scaling their business. This is when angel investors step in to help a company sustain the initial growth phase by providing assistance and capital.