A startup has its own life stages, very similar to that of a plant. Just as a seed needs proper care and watering to sprout into a plant; a startup needs the nurturing of finance to grow and explore. The funding done at the nascent stage is called seed funding and the capital is known as a seed capital.
Technically, seed funding is the initial capital used while starting the business. This capital can be obtained from family or friends and even from founders itself. However, many people mistake seed capital to be the money needed to simply cover your initial office expenses and avoid the use of personal cash. Seed capital has a lot more to it than what meets the eye. It is required for operation management, product development, early expansive market research and other initial stage activities.
Seed funding allows you to explore the business idea and transform it into a viable product or service that further attracts investors. It is the ground work for your series A funding. An entrepreneur should have an exact map for utilizing the seed investment in the best possible way to ensure smooth transition to the advanced stage of the business.
Startups raising their first seed capital will usually draw from the angel investors, VCs, individuals and firms respectively who typically invest $5,00,000 to $2 million per company. Exceptions exist, but more often than not, these angel investors don’t form indelible marks on a startup. Success or failure will still ultimately depend on the performance of founders and team, but great angels can give startups invaluable guidance during the early building process and terrible angels can make it difficult for start-ups to even survive.
Seed funding is a risky affair
Future of the business becomes unpredictable when it is in the ideation stage. Same goes with seed capital. Investors see seed funding as an ‘at risk’ investment option. Many a times, investors want to wait, check and analyze how the business idea cultivates and weather your startup has the potential to grow in the future or not. Seed investment depends a lot on the founder’s skills to make investors believe in the business idea, product or service’s benefits, his or her previous track record along with the advantage for the investors in the business.
From the viewpoint of the founder as well, seed funding should be taken after assessing the requirement and risk. Because the fact remains that every time you get funding, you have to give up a piece of your company equity to the investor. The more funding you get, more people come onboard as co-owners. More co-owners mean lesser control over your business and thus, the requirement of funding must be assessed with a clear vision of the future and acceptance of reality before going for it.
How much seed funding to raise?
Many are of the view that you should raise as much money as you would need to reach the stage of profitability, so that you would never require to raise money again. However, this may not happen at the initial stage of the start-ups. So how to come to the ideal magic number? Here are the factors you should consider:
1) Know your monthly cash burn estimate with respect to your initial requirements and only then go ahead with a presentation to an investor
2) Discuss with the investor. It is very likely that the budget you present to the initial investor may seem less/more to him. After all, it may be your first venture but the investor might have an experience of funding many such ventures. Ask for suggestions for better finance management.
3) Map the important milestones or timelines you wish to achieve and make an estimate of the same. Not only will it give you a clear financial road map but it will also instill the much-needed confidence in the investor
4) Don’t be very stringent or you may end up being under-funded and neither go to the investor with too much buffer. An investor would not like to have the business ‘overpriced’ too. Keep only as much buffer you would need to get the next funding once you achieve the desired milestone
Seed funding formalities
Unlike matured rounds of funding (Series A, B, C) the paperwork involved in seed funding is relatively less and straightforward. Even the legal charges required are quite less as compared to the seed equity. The interest rates too are usually lower and there are mostly no or very less restrictions in the manner of business working as it is still in the nascent stage.
Is getting seed funding easy?
According to data compiled by Fundable (a SaaS – Software As A Service, for crowdfunding), only 0.91% of startups are funded by angel investors, while a measly 0.05% are funded by VCs. In contrast, 57 percent of startups are funded by credits and personal loans, while 38 percent receive funding from friends and family. However raising seed capital is not that tough if you have a practical idea with a detailed business plan, a developed product and traction. Investors never hesitate putting resources in a stable start-up having potential to grow.
Conclusion
While seed funding is critical to transform a business idea into reality, don’t rush in to close the funding deal or don’t get lured by the amount of fund blindly. It is imperative to gauge your payment terms, returns, holding in the company and the vested powers of the investors. One of the most significant factors to consider before closing the deal is to ensure that the investor also firmly believes in your business idea and your execution plan.
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