Seed funding is considered the first official equity stage of a startup company. It is the first set of money that a company raises. Seed funding is ultimately designed to help companies who have developed a solid business strategy grow. More specifically, seed funding helps startup companies finance the next vital steps in the business such as building a team, conducting market research, and finalizing products.
Investors for Seed Funding
There are many potential investors that you can get for seed funding. Some investors include but are not limited to:
- Founders
- Friends
- Family
- Angel Investors
- Incubators
The amount of money that a startup company will raise through seed funding will vary greatly. In some instances, a startup company may not need anything else besides seed funding to successfully get their business off the ground. Some companies, on the other hand, will need to move on to Series A funding to continue to grow their company.
Acquiring Seed Funding
To acquire seed funding, it is important that you have more than a business idea for your startup company. Remember, when seeking out investors, your company needs to add value in some way for others to feel that investing in your company is worth it.
This means that aside from a solid business idea, your idea needs to solve an immediate need in a particular industry. Along with this, many investors will be interested to know whether your idea has a large market share and is competitive within your market.
Even more, investors are interested in knowing whether you have a team, even if it’s small, that can help you see your business idea through. No company can make it on their own and having a working team in place that is handling different parts of the business shows investors that you’re ready.
Investors will also want to know whether you’ve gained a bit of traction on your own. While they don’t expect you to have everything together, building traction can give insight into your company’s outlook, your willingness to commit to your ideas, and minimizes risks for them as they are able to see your capabilities.
It’s also crucial that you have a financial plan together. You want to show investors that your startup has the ability to generate income. This means that your financial plan needs to communicate how much money is coming into your business and what your current expenses are.
Knowing When your Company is a Good Fit for Seed Funding
Ultimately, your startup company is ready for seed funding when you’ve proven demand for your product by making consistent sales. Additionally, you should have a profitable system in place for selling your product that can be repeated.
What are the Risks With Seed Funding?
Self-Funding
The risks involved with seed funding essentially depends on who your investors are in this early stage.
For instance, while self-funding is often the quickest and easiest way to get your business off the ground, this can come with a few risks. Self-funding can limit your resources delegated to the startup, which then limits the size and the scope of your company. Similarly, this can also limit the growth of the venture in the future.
Another thing to consider is that you are the only one at risk when you self-fund. If your startup doesn’t turn out as expected, you will have to deal with all the financial implications of that.
Family/Friends
Borrowing money from family and friends can be a great idea, especially if they ‘re offering to invest in your startup with a small loan. However, this can be a risky direction if the family and friends you are borrowing from aren’t experienced with investments.
For instance, it’s not uncommon to experience disagreements and disputes over repayment terms. There can also be a misunderstanding in terms of how much authority (if any) they have over your company.
It’s possible to have tax complications as well if one or both parties don’t understand IRS guidelines for private lending.
Angel Investors
Many startups looking for seed investors favor angel investors because of their willingness to take higher risks. However, an angel investor often takes this risk with the expectation of a high return on your end.
Another thing to consider is that while you’re technically not obligated to pay an angel investor back, you do give them equity in your company. This means that you will be handing over your company’s future net earnings.
Along with this, an angel investor may want to have a little more control over your startup because they know it is a high-risk investment.
Incubators
Incubators are organizations that help speed up the growth and success of a startup company. Many incubators have the capital they can invest, links to potential funding sources, coaching, and networking. Even more, a business incubator might provide the startup with office space.
One thing that startup companies need to consider with an incubator is whether this is actually the right move for them in such an early stage. Although incubators provide various benefits, it can move your attention away from what’s really important for your startup in its critical early stages. Before moving forward with an incubator, really understand what stage your business is in and what kind of support it needs.
Getting Started with Seed Funding
If you think you’re ready for seed funding, here’s a quick guide for getting started.
By now, you should already know how critical a business plan is. With that said, it’s important to stress that having a thorough business plan in place after you have a functional prototype is key to getting investors’ attention. If you don’t know how to write a business plan or believe that your business plan could use some improvements, now is the time to hire a professional to write it for you.
Once your prototype and business plan are in place, you’re going to need a marketer. You may be strapped for funds as you are preparing to raise your first seed round, however; it’s worth it to pay the right marketer who can help push your business idea.
Where to Find Them
Aside from family and friends, you may be wondering how to find other investors such as angel investors and incubators. Here are a few places to look at.
Online Platforms: Technology has made it easier than ever to find investors eager to fund the next great idea. While many investors prefer to stay anonymous, there are plenty of directory-style sites that give startups access to a great list of global investors. Most of these platforms give you the opportunity to pitch your idea and talk further about your startup company.
Events: If you prefer to get close and personal with potential investors, events are a great place to start. There are two types of events that you should consider for your startup: venture capital events and angel investor events.
Venture capital events are generally reserved for large cities. Angel investor events, on the other hand, are all over the country. If you are located in a large city then you will get the best of both worlds. If you live in a smaller city, your best option may be to start off with angel investor events as they will be more accessible.
It’s important to note that while a startup company can attend a venture capital event, venture capital investors are more in favor of startup companies who are ready for Series A funding.
Networking and Groups: On an even smaller scale, you can find investors through designated networking events and groups. Keep in mind though, these kinds of events and groups are probably the least effective as investors prefer to screen business ideas before considering them.
Seed funding is a great step towards your startup company’s future success. If you think your startup company is ready for seed investors, it’s important to thoroughly understand what seed funding is, what you need to acquire it, the risks involved, and how to get started. If you would like to know more about seed funding or whether your business is ready for seed funding, contact us today to learn more.
