Startup Seed Funding
Seed funding is a crucial stage of a startup’s development, providing the necessary capital to bring an idea to life. Seed funding is the initial investment that a startup receives to get off the ground and cover costs associated with development, marketing, and operations. However, securing seed funding requires entrepreneurs to understand the different fundraising stages, create a compelling pitch, and identify the right investors to approach.
In this blog, we’ll guide you through each stage of seed funding and also discuss its importance, the types of investors you can approach, the factors that investors consider when evaluating startups, how to get seed funding for your startup, and so on. Let’s get started then.
What Is Seed Funding?
Seed funding also known as seed money/seed capital/seed investment refers to the initial capital that a startup receives from investors or venture capitalists to launch and develop their business idea. This type of funding typically occurs during the early stages of a company’s growth, when the business model is still in development and the product/service is not yet fully functional.
Seed funding is usually used to cover the costs of product development, marketing, and operations, and can range from a few hundred thousand dollars to a few million dollars, depending on the needs of the startup.
How To Get Seed Funding?
Obtaining funds to launch a product/service is critical for many startups. To cover this risk, they start approaching external sources. Seed funding, also known as seed money/seed capital/seed investment, is the first key round of funding early-stage startups. Generally, the process may take 3-6 months. It may vary according to startup stages, intended to finance the initial stage operations of startups such as product development, market research, and technology development, contributing to a strong foundation for successful startups. All you need is a practical idea with a strong business plan and management team to convince investors that you have a product prototype or proof of concept for your business. Once the startup establishes a user base and persistent revenue, they can proceed to fund rounds – Series A, B, C, and D. But the founder must have an exact picture of when and how to raise seed funding effectively.
Different Series Of Funding
Series A round is used to optimize its user base and product offerings. The venture capitalist is the most common source of funding for series A. The expected capital raised is between $2-$15 million.
How Series A funding works?
During a Series A funding round, the startup’s founders and existing investors will seek out venture capital firms or other institutional investors to provide additional funding. The investors will evaluate the startup’s growth metrics, business plan, and management team before making a decision to invest.
In this stage, startups are ready for their development stage. They have substantial knowledge about their product/market and decide to expand to support the company’s growth to the next level. It can acquire up to $7 million to $10 million for funding.
How Series B funding works?
The funding provided in a Series B round is typically larger than that of a Series A, and the valuation of the company is usually higher as well ( between $30 million and $60 million). This allows the company to continue scaling its operations, expanding into new markets, and investing in research and development. The funding may also be used to acquire other companies, hire key executives, or strengthen the company’s balance sheet. Both Series A and B have some similarities in terms of the funding process and the investors involved, with the main difference being additional venture capital firms taking part in bigger investments.
Series C funding occurs when a company has already achieved significant scale and is looking to continue growing rapidly. This funding helps to develop new products, expand into new markets or even acquire new companies. This stage sets a goal of raising $26 million on average.
How Series C funding works?
In a Series C funding round, institutional investors such as venture capital firms, private equity firms, hedge funds, and corporate investors are typically involved. These investors are looking for high-growth startups that have already established a significant market presence.
Given the amount of capital required in a Series C funding round, investors often look for opportunities to deploy large amounts of capital into a single investment. This means that the investors involved in this funding round are often larger and more sophisticated than those involved in earlier rounds of funding.
Most startups finish raising capital with series C. But when startups can’t achieve targeted goals, they may choose to raise Series D round. It is also known as a Down round.
Sources Of Seed Funding
Bootstrapping is a self-starting process where founders put their wealth or savings without external help. A small amount of money is set apart for the bootstrapping process at the time of starting a venture. Generally, founders may rely on internal cash flow and business revenue by substantially increasing their valuation or seeking funds from friends and family. It is an inexpensive form of funding because they need not want to return borrowed money from others. After all, it brings financial pressure on them to gain more profit. GoPro, Whole Foods, and Under Armour are some of the companies that have funded through bootstrapping.
2. Corporate seed funds
Another vital source of funding is Corporate seed funds. Big tech companies like Apple, Google, FedEx, and Intel regularly provide them with seed money if they think that startups can be a source of profit or talent for their pool. This funding can contribute to lucrative acquisitions in the future and also brings excellent visibility for startups.
Business incubators are collaborative programs run mainly by private and public entities that provide all sorts of services ranging from management training, expert advice, office space, and venture capital financing to those at the idea stage. There is no need time limit to the duration of the services provided by Incubators. They invest a small amount of funding and usually don’t take equity from startups. Nevertheless, it helps to shape the business idea perfectly. The main difference between incubators and accelerators is that incubators focus on early-stage startups, whereas accelerators focus on scale-up startup growth.
Crowdfunding is the fastest way to raise a small amount of finance from a large number of people. The word “crowd” in crowdfunding refers to the individual investors or enterprises that provide finance using web-based platforms and social networking sites with no upfront fees. It provides funds needed to get a startup off the ground in return for a potential profit or reward. It would be an alternative finance option if you struggled to get bank loans or traditional funding. Equity crowdfunding, Debt crowdfunding, Donation-based crowdfunding, and Reward-based crowdfunding are some of the types of crowdfunding.
Accelerators (also known as seed accelerators) will be the startup’s first external finance in most cases. It’s a set timeframe program designed to provide sound advice, mentorship, and resources to support startup growth on a public pitch day or demo. A good startup accelerator scales up business growth for a certain percentage of equity. Y Combinator, TechStars, and Brandery are some of the well-known accelerators in India.
6. Angel investors
Angel investors (also known as seed investors, business angels, and angel funders) are high-net-worth individuals who provide capital in return for ownership equity or convertible debt. Apart from financing, it brings expert advice, stable growth, and a greater return rate. They often save startups at the risk of failing; that’s why they are called Angel investors and invest in small amounts and take more risks when compared to venture capitalists. They may conduct detailed research, competitive analysis, and several rounds of meetings before investing. Angel investors who earned at least $2,00,000 in income or a net worth of $1 million in assets are considered accredited investors by SEC(Securities and Exchange Commission). AngelList, Lead Angels, and Indian Angel Networks are some of the significant Angel networks in India.
7. Venture Capitalist
Venture Capitalist (VC) is the most common method of seed funding. VCs are institutions that finance a significant amount of capital from large companies or corporations. Beyond the budget, it offers services such as industry insights, mentorship, support, and connections. It’s not an easier task to pitch VCs as they tend to invest in startups that show brilliant business plans, strong presentations, and wide-ranging market and growth potential. They usually demand a high equity stake and participation in management decision-making. The average venture capital investment may range from $1 million to $100 million and involves narrow investment criteria.
8. Friends & Family
Friends and family are one of the common sources of seed funding for most early-stage startups. They are often willing to invest in the entrepreneur’s vision and can provide the initial capital needed to get the business off the ground. Seed funding from friends and relatives is typically less formal than traditional seed funding sources, and the terms of the investment can be more flexible. However, it is important to approach them with a solid business plan and clear expectations regarding the investment, in order to avoid potential conflicts down the line which could affect personal life.
State Government’s Seed Funding Schemes:
- Kerala Govt implemented the Seed Support Scheme to provide monetary help to startups (having an upper limit of INR 15 lakhs ). It aimed to promote innovation-based enterprises’ creation and development, thereby encouraging growth in Kerala state through providing venture creations and increased job opportunities. Kerala Startup Mission enforced this scheme.
- Govt of Karnataka provides seed funding under the “idea2PoC” program of the Karnataka Startup policy. It aims to provide seed funding to ideas or concepts which are yet to validate the proof of concept. It’s granted only one time, having an upper limit of INR 50 lakhs, and provided in installments over a maximum period of 2 years.
- Govt of Haryana granted a seed fund of INR 3 lakhs for the authenticity of ideas, prototype development, traveling costs, and expenses for carrying out the initial activities of startups.
- The Government of Bihar will give a seed grant of up to INR 10 lakh as an interest-free loan for furnishing authenticity of ideas, prototype development, assistance towards traveling costs, and almost all expenses required for setting up startups within ten years.
- Seed Capital Fund Scheme turned an essential component of the Sher-e-Kashmir Employment and Welfare Programme for Youth (SKEWPY) into the Govt of Jammu and Kashmir (JK) initiative. It is a one-time grant that aims to provide seed funds up to INR 7.5 lakh to contribute to employment opportunities among youth and make business plans profitable.
Getting Seed Funding: Steps Involved
Step 1: Determine What Type of Funding You Need
Before seeking seed funding, it is important to determine the type of funding that is most appropriate for your startup. Seed funding can be in the form of equity, convertible notes, or simple agreements for future equity (SAFEs). Each type of funding has its own advantages and disadvantages, so it’s important to consider which option aligns best with your business goals and needs.
Step 2: Determine How Much to Raise
Once you have decided on the type of funding you need, the next step is to determine how much capital to raise. This will depend on the stage of your startup, your business goals, and your financial projections. You should create a detailed financial plan that outlines your expected expenses and revenue projections for the next few years.
Step 3: Create a Pitch Deck
A pitch deck is a visual presentation that outlines your business idea, market opportunity, financial projections, and team. It should be concise, engaging, and persuasive. A pitch deck typically includes slides that cover the following topics:
- Problem: Define the problem your product or service is solving.
- Solution: Describe your product or service and how it solves the problem.
- Market: Define the size of the market opportunity and target customers.
- Business model: Explain how your company plans to generate revenue.
- Competition: Describe your competitors and how your product or service is unique.
- Team: Introduce the key members of your team and their expertise.
- Financial projections: Outline your revenue projections, expenses, and funding needs.
Step 4: Meet With Investors
Once you have a pitch deck, you can start meeting with potential investors. This can include angel investors, venture capitalists, and even family and friends. You can also attend networking events and pitch competitions to connect with investors.
When meeting with investors, it’s important to be prepared and professional. You should be able to answer questions about your business plan, financial projections, and team. It’s also important, to be honest, and transparent about any risks or challenges your business may face.
Step 5: Negotiate Terms
If an investor is interested in funding your startup, you will need to negotiate the terms of the investment. This can include the amount of funding, equity stake, and other key details. This is typically done through a term sheet, which outlines the main terms of the investment.
It’s important to seek legal advice when negotiating the terms of the investment to ensure that you fully understand the implications of the agreement.
Step 6: Finalize The Deal
Once the parties agree on the terms, the investor will provide the funding to the startup in exchange for an equity stake. At this point, the parties must sign legal documents to finalize the deal.
We Help You Raise Funds Effectively
Looking to raise funds for your startup? Our financial modeling service can help. We work with you to create a detailed financial model, identify sources of funding, develop a pitch deck, and provide ongoing support throughout the fundraising process. Our expertise and guidance can help you increase your chances of securing seed funding and kick-starting your business. Connect with our experts to learn more about our services.
Seed Funding FAQ
1.) How much is seed funding?
Seed funding round amount typically ranges from $500K to $2M. But this can vary depending on factors like location, industry, the track record of the startup founder, and more.
2.) What documents are needed for seed funding?
The specific documents you would need to raise seed funding can vary depending on the investor and industry. But some common documents that you will need are the pitch deck, business plan, financial statements, and projections.
3.) What are the requirements for seed funding for startups?
The requirements for seed funding can vary depending on the investor, but some general requirements include a business idea, an MVP, a capable team, and an idea of your target market.
4.) What comes after seed funding?
After seed funding, startups typically move on to their next round of funding, which is Series A. This round is typically aimed at helping startups expand their operations and develop their products or services further.
5.) How is Seed Funding Different From Series A, B, and C?
Seed funding is the initial stage of funding for a startup, while Series A, B, and C are subsequent rounds of institutional funding used to expand and scale the business. Funding amounts increase with each round, and investors become more involved in the company’s operations as it grows.