Globally, there are about 305 million startups created each year. These entrepreneurs and startup founders starting this journey need capital to run all core operations, from hiring a team to marketing their business.
Most startup founders turn to seed funding to get their businesses up and running. So, how does seed funding for startups work?
This guide will walk you through the process of obtaining seed capital. We cover how to go about it and when and why you should consider seed funding to help you get started.
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Seed funding is the first official funding stage for most startups. (Read this article for information about pre-seed funding).
It refers to the initial amount of money a startup raises before moving to the next funding rounds; series A, B, and C. This early financial support helps startups finance their initial steps and activities, such as product development and market research.
Unlike loans, you need to pay back the financier; the seed funding investors provide you with this money in exchange for a stake in your company. Seed funding comes from accredited investors like angel investors, venture capital investors, and crowdsourcing campaigns.
Statistics show that 77% of businesses rely on personal savings for their initial capital. However, as the business expands, the financial needs increase. At this initial stage, startups require funding to avoid failing.
Businesses engage in a seed round to raise money to cover initial costs like employee salaries, product development, and infrastructure costs. Seed capital is handy to ensure that the company gets a solid start.
Additionally, the primary purpose of this type of funding is to allow startup founders to prove that the business idea works. As you seek startup funding, different investors will have their own requirements before financing you.
Raising a seed round makes it easier for startups to compete with established companies with capital reserves. Once you have seed capital investors, you can keep the business steady and run operations more smothly. If you want your startup to survive, you can turn to seed fundraising options.
Timing is crucial when embarking on a funding round. It would help to approach seed investors when you have a solid product or team. This, however, can also vary depending on the investor or founder.
For instance, some investors will approve a round if you can prove that your products are selling. In contrast, others will sign off on a compelling business proposition. Therefore, as a founder, you should seek vc seed funding once you can show potential investors that the product or service fits the market and has growth potential.
If you are planning to engage in seed rounds, you need to know how to raise seed capital by understanding that there are different types. Each option will not work for all types of startups; therefore, it’s up to you to explore the best option for your business.
● Angel investors: As one of the most popular sources of seed funding, an angel investor is a high-net-worth individual that provides capital in exchange for equity. They are seasoned investors who understand the risks of investing in a startup.
● Venture capitalists (VCs): While angel investors invest their own money, VCs invest with other people’s finances. VCs are more established and provide funding to many more investors; therefore, they might have several procedures to be followed before they agree to fund your business. VCs will take between 20% to 50% of the company to provide funding.
● Crowdfunding: There are more than 1,400 crowdfunding platforms in the U.S alone. They are a popular funding platform because any entrepreneur can upload their business to get funding from anywhere in the world. Some crowdfunding campaigns don’t allow the financiers to own a portion of the company; however, with equity crowdfunding, investors provide funding in exchange for a stake in the startup.
● Accelerators: Accelerators are seed investors providing services such as mentoring, networking, and workspaces. Their funding will help you cover the early business expenses in exchange for a 5% to 10% of your equity.
● Friends and Family: Friends and family members are also a common source of initial funding. If you choose to follow this route, ensure that you inform them of the potential risks of the seed investment.
The money you raise at the seed stage depends on the business needs and industry focus. However, it’s important to raise capital that allows you to achieve profitability. If your startup attains profitability, you won’t need to raise another round. In addition, your business will survive in case the funding opportunities dry up.
Pro tip: use Cooley to get a better idea of financing trends across time
Although most companies eventually move to raise Series A, it’s advisable to ask for funding that will sustain the company until then. One of the ways to do this is by calculating how much money the startup will use each month and the time span the business plans to survive on the capital raised in the first seed round.
There’s no standard revenue required to get the initial seed investment. Some potential investors will only invest in startups making money, while others will be okay with your ideas and growth strategy. Apart from revenue, you can also show potential investors other elements of the business, like press coverage, social media mentions, and customer feedback.
Generally, seed rounds can take about 6 to 12 weeks to close the deal. This period varies for different reasons.
● Finding a suitable investor for your startup can take time, depending on your pitch and approach.
● The period could be shorter if your documentation is in order, which speeds up the process.
● If you need to manage the daily business operations and the seed fundraising process, it can slow down the seed round.
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Raising a seed round can change the trajectory of your business.
Before engaging any potential investors, you need to understand the different types of available seed funding options. You can get funding from VCs, crowdfunding, or your family and friends, depending on your type of business.
Hopefully something in this guide was helpful as you continue to learn more about seed rounds.
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