Every business begins with an entrepreneur and a great idea. However, in order to flourish, they require capital to expand. Apart from establishing a strong foundation, successful startups must also have money for building great products, hiring employees, advertising their products, and everything else.
Given that most startups take two to three years to get profitable, they'd require a significant chunk of money to cover their expenses. So how can organizations begin accumulating this money?
Seed funding is the answer. It is the first phase of startup funding (second, if you include the pre-seed), where the entrepreneur raises money via different sources. Unlike loans, seed funding for startups doesn't need to be returned; instead, the startup allocates some of its share in return.
Here is everything you need to know about seed funding, types of seed fundraising, and how to raise a seed round.
Not every type of seed capital suits all startups. Hence, it is critical to investigate every channel to determine which one gives your startup the greatest chance of success.
The following are the most popular ways to raise seed funding in current times:
More than 500 crowdfunding platforms are currently available, and they're popular among startups. Kickstarter, FundRazr, Wefunder, and Indiegogo are just a few of the platforms that can assist you in raising the capital you require to expand your business.
It is to be noted that some platforms have time constraints for collecting funds. Many—like Kickstarter—require that funds are collected only after the goal is reached. In addition to transaction processing fees, most platforms charge a percentage of the amount raised as a fee.
Athom, a smart home company, raised $1M in seed funding in 2015.
Corporations such as Apple, Intel, and Google invest in startups as a primary source of talent, intellectual property, and profit. If you have an exceptional startup idea that is powered by innovation, you have a chance to get such seed funding.
For example, Mozilla, recently launched a $35M venture capital fund for early-stage ‘responsible’ startups.
Incubators are often designed to assist early-stage firms in developing new ideas and generating innovation. They offer small investments, networking and mentoring, workspaces, demo days, and pitch events.
Some popular incubators in the USA are:
Accelerators such as Techstars and Y Combinator are scaled incubators that help startups grow further. In exchange for a set amount of funding, they ask for a fixed percentage of equity. Mentorship, networking events, demo days, and pitch events are additional perks you get with accelerators.
Accelerators can even provide indirect funding through mentorship or mentorship opportunities. Some accelerators also provide workspace support, including access to technology and services that help their expansion.
The following are the most popular accelerators in the USA:
Angel investors provide seed money to newbie companies in exchange for a portion of the share. Convertible debt is a popular choice among angel investors because it allows the money lent to be converted into equity. In addition to convertible debt, angel investors may also offer convertible bonds, which are debt instruments that may be converted into equity.
Here, you should know that by using convertible debt, a company's value is not evaluated until the next round of funding. At that time, the debt is converted into equity, and the investor receives an 'early investor' discount.
Recently, an angel investor has invested an additional £100,000 into a Hull-based no-code app developer to support its expansion.
Large angel investments can be made by groups of angel investors. As they invest more substantial sums, they receive larger potential returns and own larger ownership shares as a result. Investors from a variety of industries and markets are usually included in angel groups, and they usually decide as a group whether to invest, how much to invest, and on what terms.
Investors in venture capital funds provide seed funding to startups with exceptional growth potential. Venture capitalists are usually screened, and their contributions to startups may include expert advice and funding. Venture capital investment usually involves swapping ownership shares for support.
Recently, Courtyard, an NFT platform, raised $7M in seed funding via several venture capitalists.
With this approach, entrepreneurs avoid giving away equity or taking on debt by using their personal wealth to fund the startup. However, this method isn't recommended unless you have a significant chunk of money in the buffer.
Family and friends are the most common way to seed funds. Because many startup founders have friends or family members who are also entrepreneurs or investors, many startup teams include former founders who may have colleagues or friends seeking seed funding.
Debt funding is a traditional form of seed investment. Conventionally, banks provide debt funding, but some investors may also issue loans instead of requesting equity in return.
There are several funding levers to choose from, each offering a unique advantage. Friends and family are often the easiest sources of fast funding, but they can come at the cost of damaged relationships.
Angels, incubators, and accelerators all give a wealth of intangible benefits, but they may be difficult to obtain, depending on your startup's business plan. Finally, venture capital usually works best when a startup has a well-established framework already.
Raising a seed round can be intimidating if you have never sought outside investment before. However, if you are willing to give up a portion of your company and have demonstrated the potential for growth in your idea, you are ready to begin seeking seed capital.
Here is how you can obtain funding:
A pitch deck is a company presentation used to seek venture capital for your startup. When looking at investment possibilities, seed investors expect to see pitch decks.
Pitch decks provide a range of benefits, including attracting investor interest and converting it into action. You create a pitch deck to inform investors about your startup, its present position, and where it is heading.
Make sure your pitch deck tells the tale of you and your firm. Make it appealing and impress investors with your background and the motive behind your idea. An engaging narrative is more likely to be remembered than mundane statistics and numbers.
Your pitch deck should include details about your business, your target customers, and the steps you'd take to grow your startup. Ideally, pitch decks should consist of between 10 and 12 slides, and you should keep it short and simple. Use charts and diagrams to express one idea per slide.
Here is an example of Airbnb pitch deck:
Get this pitch deck from Slidebean
It is not practical or worthwhile to seek funding from every investor in the country. Hence, you must identify your preferred investors. But how do you identify those who are likely to succeed?
Many entrepreneurs rely on their existing business networks to find investors. Others seek out lists of active investors through incubators and accelerators.
The following are the critical factors you must evaluate when seeking investors:
Having the right investor in preference is critical to getting the funding you need. Entrepreneurs often make the mistake of focusing exclusively on money. Instead, they should also focus on whether they'll get other benefits like guidance, networking, workspace, etc.
It's recommended to evaluate your prospects in the same way you would in a sales funnel, with the most important investors at the top and the least important at the bottom.
Investors prefer to receive a pitch deck when they are first contacted (mostly, not in person). Keep it formal but friendly and get to the point. If those who are interested in learning more don't reply, don't be discouraged. Simply move on to the next one.
Then, it's time to move on to the difficult portion: meeting investors face-to-face. This is a phase where you will develop an in-person presentation skill over time.
Following are the rules of a successful meeting:
Prior to meeting with investors, practice your pitch several times at home. You will discover what works and what does not over time. For many, the initial presentation is uneasy. Don't let a terrible pitch dissuade you from meeting other investors; just learn from it and move on.
When negotiating an investment deal, you start at a disadvantage because the investor has much more experience than you. However, an investment agreement isn't the end of the line, no matter how exciting it may appear to you. Many entrepreneurs fail during negotiations and sign unfavorable deals.
Generally, you should never accept the first deal you are offered, whether it is a loan, equity, or something else. You must carefully consider your counteroffer rather than negotiating immediately. What about an investor that demands 25% of your company? Is it acceptable as you grow?
It is vital to keep in mind what your company is worth and whether it is a fair deal. For this reason, you should never negotiate instantly.
An investor agreeing to provide time and expertise should also be considered. Politely demand everything in writing and be specific.
There is no straightforward formula to determine how much money your company should raise, but you can use your company's metrics to arrive at a specific amount. Keep in mind that you should only seek as much money as you need to proceed to the next phase of your business's development.
Here are three factors to calculate the money you should request:
Milestones are benchmarks you want to reach before entering the funding round (Series A in this case), and they are usually tied to specific company metrics, such as acquiring 10,000 customers or releasing an MVP within a certain timeframe.
A small portion of the money is usually required to help your business reach the Series A funding phase.
The amount of time you can fund company operations before you run out of money is known as a runway. For example, if you have $100,000 in funds and require $10,000 a month to run your company, you have ten months of runway.
You should strive to raise enough money to give yourself a couple of years of runway, as this is the typical amount of time required to move from the seed round to the next.
A company's worth is subjective; however, it is often a direct result of two things: how much money the firm generates and how much equity it sacrifices. During the seed phase, most entrepreneurs give up around 20% of their equity and another 20% during the Series A round.
Once you've defined your company's milestones and calculated your monthly operating costs, let's say you determine you need to raise $2 million in your seed round. If you don't want to give up more than 20% of your personal equity, you'll need to shoot for a negotiated valuation of $10 million (since $2 million is 20% of $10 million). That amount gives you the money you need to reach your next objective without excessively diluting your equity.
Don't forget valuations are fluid. So it's important to strike the right balance between raising enough money to support future expansion and preserving a reasonable percentage of ownership.
It is true that seed funding your startup isn't a piece of cake. But, if your business idea is worth the money and you present it to the people the right way, there are high chances that you'll get yourself funded.
So don't wait any longer, and start gathering money.
