There’s a typical dilemma that many business owners confront at some point. A solid concept with great potential, the seeds of a fantastic team, and an established strategy for bringing their business to market are all assets they possess. However, there is one element that is lacking. Finances to get things started and the know-how to secure those funds. So, entrepreneurs have to deal with the same two issues. And it is at this point that your knowledge of “how to seed funding for startups” will come in handy.
This article will assist you in overcoming the difficulties mentioned above so that you can get off the ground.
What is seed funding for startups?
Investopedia defines seed funding as money that comes from any source that helps a company get off the ground and into the stage of its business when ideas become realities. Companies may use seed capital to launch a particular product or idea or even enter a new market with the help of various investors.
Unlike a loan, seed funding is not a form of financial aid. As a condition of receiving funding, business owners often provide investors with an ownership stake in the firm and a percentage of the company’s earnings in return for their capital investments. Angel investors, friends, family members, and the original firm founders are often the sources of early investment for startups. In addition to bank loans, a startup may seek capital from angel investors, which is usually favored in its early stages. According to Startups.com, seed investments typically range between $500k and $2 million.
Starting a business from the ground up necessitates the use of seed funding. The firm has not yet shown its worth in the market, as a result of which it bears a somewhat high risk.
What’s the importance of seed funding for startups?
Many entrepreneurs cannot reach the stage where their product is ready for sale unless they have raised a significant amount of funding. Many costs add up quickly when you start a business. These costs include product development, employee salaries, infrastructure costs, etc. You could spend a lot of money before you even have a product to sell.
These and other critical growth phases are made possible by seed funding for startups. In addition, seed funding helps founders spend on early marketing and public relations, essential appointments, such as bringing on a Vice President of Product or a Chief Technology Officer, and forming a productive sales team.
When is the right time to raise seed funding for startups?
Raising initial investment for a startup may be a complex process to time correctly. As a rule of thumb, you should only talk to seed investors if you think you are in a stable position. As such, you have a strong enough product, market, team, or combination of those things. So, you are almost ready to build a company that deserves to be backed by venture capital. In other words, you can expand and develop your business to the point where an investor can get a good return on their investment.
Founders should seek funds after they have determined the market potential and who the client is, and when they have developed a product that meets their demands and is being accepted at an exceptionally remarkable rate. Furthermore, to obtain funds, entrepreneurs must impress investors. Those who failed to impress investors the first time must focus more on improving their business concepts and products. If you believe that your company has what it takes to deliver significant returns to an investor, it is most certainly time to begin the fundraising process.
Steps to obtain seed funding for startups
It doesn’t matter which route you choose. The first step in securing seed funding for startups is enhancing your company’s visibility. Participating in networking events, attending conferences, and developing your online presence on social media all raise the likelihood that you will attract investors’ notice.
Prepare to talk about your company in the next step. At this point, you should have a well-thought-out business strategy that includes reasonable forecasts for expenses, revenues, and future development. In doing a detailed SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis for your company, you will demonstrate your understanding of how your company fits into the broader market. Do you have a network of mentors or experts in your field that can help you? Don’t forget to link investors to resources that may provide them with in-depth information about your concept or product.
You can follow these steps for seed funding for startups
1. Decide on the type of funding you want
There are various options for obtaining seed money, each with its own set of advantages and disadvantages:
1. Venture Capitalists
Venture capitalists (VCs) are entities that have been specifically created to give finance to businesses. The most traditional fundraising option, mainly as you go through Series A investment and beyond, is via venture capital. Most venture capitalists (but not all) are amenable to seed money. And you should expect these investors to be quite conscientious, frequently demanding many meetings and the participation of numerous stakeholders.
2. Angel Investors
Angel investors are the second most prevalent form of investor for seed funding for startups, behind venture capitalists. Unlike venture capitalists (VCs), angels are wealthy individuals who invest in early-stage enterprises with their own money. Obtaining initial capital from angel investors may be a speedier procedure that requires less due diligence. Nevertheless, angel investors often seek a more significant ownership stake in return.
3. Friends and family
Many early-stage enterprises get initial investment from friends or members of their families. This provides you with a little more freedom in terms, as you may approach it as a loan rather than an equity exchange. But it also introduces the difficulty of combining your professional and personal lives, which can rapidly become a cause for catastrophe if not handled properly.
Sites like Kickstarter have made crowdfunding a popular alternative to traditional venture capital, enabling thousands of entrepreneurs to begin their businesses. So, this has recently become a favored method for seed funding for startups. Creating a crowdfunding campaign based on product pre-sales and then persuading hundreds or thousands of contributors to invest in your product before it hits the market is how this kind of seed fundraising is often accomplished. You may produce the product and fulfill the requests of each of the early investors if you gather enough funds. And this does not require sharing the stakes as well.
5. Accelerators and Incubators
Many companies, like Y Combinator, are called accelerators or incubators because they help people start and grow businesses. For their services, it’s not unusual for these corporations to ask for stock in return. And in certain situations, they may be able to offer startup money for smaller businesses.
Keep in mind that not all businesses need outside capital to be successful. Making an investment of your own money or just depending on your firm’s income to fund future development is what bootstrapping a startup is all about. Bootstrapping enterprises that achieve success is not the norm. But there are some exceptional instances of bootstrapped businesses worth mentioning (Facebook and Apple, to name two).
2. Calculate the amount of seed money you will need
Overlooking this stage is typical when seeking seed investment for new businesses. Don’t be tempted to request an excessive amount of startup financing. But how much is too much in this case?
Start by calculating your current monthly expenses. Next, estimate how many months it will take to get your company up and running from that point on. What changes do you expect to occur in your company over that time period, and what influence will this have on your costs? To account for unforeseeable variables, add a percentage to the top of it after you’ve calculated a value.
Your business’s value will ultimately determine how much money you can raise via a crowdfunding campaign. When it comes to raising seed funding for startups that are just laying the foundation and getting off the ground, the focus will be on the company’s growth potential rather than on the value of its assets or intellectual property. The amount of growth your business will make with various investments of varying sizes, as well as the percentage of the company you’ll have to give up to get that initial money, must all be taken into account.
3. Make a plan for approaching potential investors
To feel comfortable investing their money in your firm, investors need to see indications of potential success. In other words, whether they believe you and your team are the best individuals to bring the vision to life will play a role in their selection. However, a large portion of their judgment will be based on objective criteria, such as detailed plans and financial projections.
You should have an executive summary and a pitch deck ready to go that includes:
- Identifying information about your firm, such as its name, logo, or slogan
- Your long-term objectives
- The issues that your product addresses are
- Who is your ideal customer?
- What you’ve developed and why now is the right time.
- The market size that can be targeted
- Your traction
- Your company’s business model
- Predictions on the financial situation (revenue, expenses, profit)
- An in-depth examination of overhead costs, including utility bills, salaries, rent, product development costs
- Long-term strategy for future product development as well as financial planning (beyond the runway this funding provides)
- You and your team, including who they are and what they bring to the table
- What you’ve previously raised and what you’re hoping for in terms of fundraising
4. Create a list of potential investors to contact
Obtaining seed funding for a startup may be a time-consuming and challenging process. As a startup, you’ll have to meet with several possible investors. The easiest way to think about this is in terms of an investor funnel. What you’re really doing here is creating an investment pipeline. Because each possible investor is a fresh lead, you want to make sure that you do the following:
- Make sure that the investors at the top of your funnel match the characteristics of your ideal investor persona.
- Leads should be scored and prioritized based on their importance (the investors most likely to fund you).
- Make sure that you work on each of those connections all the way down the funnel until you win the deal.
- Use active investor search services such as Visible Connect to find active investors that suit your needs.
6. Meet with potential seed investors
Meeting with investors is a talent that you’ll develop through time and practice. To your advantage, you’ll have plenty of hands-on experience dealing with a variety of potential investors before you ever sign a contract. The following are the essential guidelines to remember while meeting with possible seed investors:
- Ascertain who your target audience is before you begin (the investor, not your customer). Recognize the types of investments they make and why they do so.
- Make your pitch as simple as possible. Concentrate on the most critical elements and keep them short and sweet.
- To show respect, learn from their comments, and create mutual trust, pay close attention to what they have to say.
- Pitch your goal, and make it a big one. But be sure to back it up with data and statistics.
- Make sure you strike a fine balance between self-assurance and humility. You want to demonstrate that you believe in your concept and are a capable entrepreneur. But you don’t want to come off as arrogant in your approach.
7. Finalize the terms of the agreement
For many entrepreneurs, negotiating may be a difficult task. Because a VC or angel investor performs this daily, you’ll most likely find yourself on the defensive side because they’re much more experienced than you are. It is therefore preferable not to engage in real-time negotiations.
It might be tempting to accept the first offer you get. And although you definitely don’t want to waste any time, it’s worthwhile to try to bargain on variables such as equity compensation if you have the opportunity.
One percent of a $100 million firm is worth $1 million, so consider how much future value you’re giving up by investing now. But don’t let the opportunity pass you by. You must get the funds into your account as quickly as possible. So, after you and your partner have reached an agreement, sign the documents and settle up.
Takeaways to Remember
It’s no secret that seed funding for startups is a complicated process. Do you want to offer your startup the best possible chance of success? Understanding is ultimately essential, and we hope our information on initial capital for entrepreneurs has been of use in that regard.
Additionally, you must be familiar with the various sorts of investors, their strengths and weaknesses, and how they make investment choices to appreciate better how seed funding might benefit your organization. If you follow these steps, you will be well on your way to obtaining the seed funding for startups that will put your company on the path to success.