The Ultimate Guide For Seed Fundraising
Great businesses are born out of great ideas. If a visionary idea is nurtured the right way.
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Great businesses are born out of great ideas. If a visionary idea is nurtured the right way, it can manifest itself into a thriving business. However, it is always easier said than done when it comes to launching the right startup and making the right move.
Despite having great ideas, several businesses fail to get launched because a number of reasons, one of the most common ones being lack of the right funding.
Startup fundraising is arguably the most important element of getting your business on floors. Once you have a strong business plan and have your financials sorted, all you need to do is start managing the funds and your newfound business will start taking shape.
Seed funding is the stage where it is important for a new entrepreneur to tread slowly and carefully. It is here that they can make or break their million-dollar idea. If you are thorough with how to raise funds for your business from the right sources, you can consider half of the job done.
So, what is seed funding?
What Is Seed Funding?
Seed funding is the first and the earliest stage of capital financing for a business. This is the first time funds are put into the operation and development of a business without being certain about where it is destined to go.
The risk involved in seed funding is high as the financers have no idea how well the startup will be received in the market. The decision of providing seed funding for a new and growing business is made on the basis of the effectiveness of the business plan and the conviction of the entrepreneurs.
Seed funding is gaining more popularity in countries like India over time. Seed funding in India has evolved because of the emergence of new young businessmen who are willing to give their dreams the shape of a successful business. Although India never had the problem of lack of ideas, aspiring entrepreneurs often struggled in finding the right direction and the right guidance to carry on with their new business.
With the increasing popularity of seed funding, financial companies and individual financers are willing to invest in a startup they see high potential in. It is well-known across the world that once an initiative finds a stronghold in an Indian market, the sky is the limit!
What Is The Purpose Of Seed Funding?
The purpose of seed funding is to provide enough funding to a startup that it is able to serve all financial needs of the business until it is officially launched. Although different investors have different seed funding conditions, the most common way to go about it is to take care of the business' finances until the business is officially on floors.
The purpose of seed fundraising is for the entrepreneurs to prove their vision to the finances as well. The money obtained from seed funding is used for leading the business in the right direction and building a strong foundation for the business.
The Pre-seed Funding Stage
As the name suggests, this is the funding round that comes before an entrepreneur goes for full-fledged seed fundraising. At this stage, the entrepreneurs cover the basic and initial costs of starting a business.
Funding for this stage of often received from friends, family, supporters, or from one’s own pockets. At times, an independent investor looking for some profit may jump in if they find potential in the startup.
When Are You Ready For Seed Funding?
There are no stringent rules and guidelines one needs to adhere to for qualifying for seed funding. Different ventures may see different signs that tell them that are finally ready to take the next step.
However, here are some of the most basic requirements a startup should meet for going ahead with seed funding and approaching investors who may be interested in the same:
- You should have a minimum viable product (MVP) capable of giving early signs of traction
- You are able to show potential for the product-market fit
- You have started with the process of onboarding clients and customers for using your product/service
- A strong founding team with distributed authorities and responsibilities is in place
- You are capable of developing a prototype to convince the investors
- You are ready for making critical hires for running your business
How Is Seed Funding Different From Series A Funding?
Both investors and entrepreneurs often get confused between seed funding and Series A funding. While seed funding is the first official stage of borrowing capital funds for a startup, Series A funding is the round that follows seed funding.
When a company is first founded, the stock options are first sold to the founders of the company and the angel investors, a process that falls under seed funding. After this, the company has an option of selling the preferred stocks to the investors, a process that falls under Series A funding. In simple words, a company can go ahead with Series A funding after it has built a strong foundation and all the initial financial needs are taken care of.
Unlike seed funding, by the time you reach the Series A funding age, your startup is likely to have started generating a stable revenue and you are in a position of scaling up your business a notch. While the purpose of seed funding is to prove that your products/services can work successfully in the market, the purpose of Series A funding is to leverage your products/services and focus on growing and diversifying your business.
What Are The Major Seed Funding Sources?
There are many alternatives at your disposal if you are willing to get seed funding for your startup. However, it is never a good idea to unnecessarily hurry in making the selection. Always analyze every option available to you and go with the one that best suits your business.
Here are some of the major sources for seed fundraising that you can choose from:
Bootstrapping (Personal Funds)
This is the most fundamental source of funding for your startup. If you are not willing an external investor to have a say in getting your business started and want complete control over your business decisions, you can put in your personal savings in the form of seed funding. However, this is not an advisable option if the funds needed are too high.
Crowdfunding is one of the most common ways of seed fundraising for startups. It involves the entrepreneurs borrowing usually small amounts of funds from a number of investors to create a pool of the seed funding amount needed.
Hundreds of reliable crowdfunding platforms are available on the internet where interested investors from across the world can contribute towards funding startups with potential.
Corporate Seed Funds
Corporate seed funds involve finances provided by some of the biggest names in the industry to startups they see potential in. Companies like Google, Apple, and Intel are known for supporting startups they have faith in. Obtaining corporate seed funding provides high exposure and visibility to startups, helping them make it big in the industry.
Unlike providing funds to entrepreneurs for setting up a business, accelerators provide financial backing to startups for helping them scale up their business. As the name suggests, these sources accelerate the rate at which a new business grows and diversifies to attain the desired traction.
Angel investors are often the favorite seed funding source for startups. They are the investors that provide the required capital to a startup in exchange for ownership equity or convertible debt. This leads to a win-win relationship as the startup gets the funds needed while the investor gets a stake in the company.
Incubators are the seed investors that provide smaller seed investments and offer extra services like office space, staff training, etc. Most incubators do not shell out a large sum of money or ask for a stake in the company but go beyond providing mere financial help to the new entrepreneurs.
This is another highly common way of seed fundraising. It involves borrowing loans and advances from financial institutions, banks, NBFCs, or even friends and family.
However, many angel investors and venture capitalists also provide loans to startups for taking care of their financial needs and getting a successful launch in the market.
Here, the seed funding starts off as a normal loan but may turn into equity in the company or shares depending on the progress made by the company. This conversion often takes place when a company reaches specific milestones like sales revenues.
Venture capitalists are the marquee investors that provide seed funding support to startups on the basis of growth potential, the vision of the founders, market conditions, business idea, plan of execution, or other relevant parameters.
Just like angel investors, venture capitalists often ask for a specific portion of equity or stake in the business they invest in. Generally, venture capitalists have multiple rounds of funding after the seed funding stage provided the business succeeds in reaching these stages.
Angel Funds/Angel Networks
Angel funds or networks built by a group of investors where they invest a limited amount of funds in the beginning stages of the development of a startup. By taking the help of these groups, entrepreneurs can get financial help and productive advice for running the company in a better and more sustainable way.
Important Seed Fundraising Rules To Follow
Here are some of the most important rules entrepreneurs should follow to get successful financing for their startups:
- Do not spend too much time on seed fundraising and get done with it as soon as possible. It is important to focus more time on developing your products/services.
- Do not stop seed fundraising too soon. Even if the situation seems difficult, it is important to stay in for the long run.
- Conduct thorough research to look for the best sources and talk to as many investors as possible before finalizing the ideal option.
- Never delay the matter after an investor agrees to go ahead with seed funding. Keep your papers ready and start with the formalities right away.
- Keep looking for customers and leads for your business. This will add to the potential that an investor sees in your business before funding it.
- Always go the ethical way, no matter how lucrative the other way seems. Hard and ethical work always pays off in the end.
- Different investors have different ways of saying “no.” It is important for an entrepreneur to understand when an investor is really not willing to provide funds. Never make the mistake of pushing too far. This closes future doors as well.
- Have a unique style and personality that helps your business stand out from the clutter.
- It is important to stay organized from the very first day. Be clear in delegating responsibilities, distributing powers, and keeping a track of all deals.
- Always carry your business and yourself with confidence. However, never cross the thin line between confidence and arrogance.
What Not To Do While Interacting With The Investors
Before you go ahead into the field and start approaching seed investors, here is a list of things not to do when you communicate with them:
- Never be dishonest
- Never seem aggressive
- Never seem indecisive about your business
- Never break an agreement (verbal or written)
- Never create detailed financials
- Never use fake data/statistics
- Never be slow in following up
- Never claim that you know something that you don’t
- Never take a “no” personally
The Final Word
In 2021, if you have a visionary idea and a powerful business plan, you will have a number of opportunities to get seed funding for your business. All you need to keep in mind is to choose the right seed fundraising source and approach an investor(s) you can rely on.
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