What Is Seed Funding?
Seed funding is a type of funding that entrepreneurs receive after they have found the market fit for their business. This funding is provided in exchange for equity by private investors to founders who cannot bootstrap themselves.
Seed funding is raised from wealthy individuals or angel investors, friends and family. Entrepreneurs can also utilise their personal wealth to fund their startups and later raise external funding to scale.
What Is The Importance Of Seed Funding?
Raising funds to launch a startup is an arduous task for entrepreneurs who don’t have sufficient capital to cover the initial operational costs of their planned ventures.
Finances for the checklist go beyond the financial support from friends and family. This is where entrepreneurs can seek external funding, the seed money, that helps them cover the costs and generate revenue to grow and scale their businesses sustainably.
Once these seed stage startups gain traction and start generating revenues, they can further raise funds from VCs to scale significantly.
What Is The Typical Amount Of Seed Funding?
The seed funding amount depends upon who is being approached to raise funds, a private investor or a government entity.
On the other hand, startups can raise anywhere between a few hundred thousand dollars to a couple of millions from private investors. For instance, traveltech startup Scapia raised $9 Mn in a seed round led by VC Matrix Partners India in June 2023.
What Are The Different Stages Of Funding?
Pre-Seed Funding
- It is the initial stage of funding for startups to validate their ideas and build an MVP.
- It involves small investments from founders, friends, family or angel investors.
- The focus is on testing the market viability of their product or service.
- Seed capital is sourced from personal savings, loans, or investors.
Seed Funding
- It follows pre-seed funding and counts as the first formal funding round for startups.
- There are higher investment rounds wherein the capital is raised from angel investors, VCs or crowdfunding platforms.
- In this round, the seed capital is used to develop the product, build the team and gain early market traction.
- Seed capital can be obtained through equity financing, convertible notes, and loans.
Series A Funding
- This funding round happens after the seed funding to support growth and market expansion.
- It Involves larger investments from VC firms.
- The focus is on scaling operations, generating revenue, and refining the business model.
- To raise Series A funding, startups require a validated product-market fit.
Series B Funding
- Startups aim to further scale for this funding round.
- It involves substantial investments to delve deep into the market and expand operations.
- There is more emphasis on customer acquisition, building strategic partnerships, and entering new markets.
- Startups have to demonstrate strong revenue growth, a proven business model and market dominance.
Series C & Beyond
- Now the startups can raise significant capital to expand globally or prepare for an IPO.
- These rounds are led by late-stage VCs or PE investors.
- Startups must show a clear path to profitability, sustainable growth and a mature business.
What Are The Benefits Of Seed Funding For Startups?
Seed capital funding helps those entrepreneurs who have modest personal savings or lack resources and mentorship.
Being able to raise seed capital from investors successfully can be validating for the founder’s business idea. It means that the initial investors have shown faith in the startup, which will help them raise VC funding in the later stages to scale their business.
Raising seed funding from angel investors and VCs also means that the entrepreneurs are getting more than seed capital. Founders will also get a chance to leverage the networking and connections of their investors. Besides this, they will also receive mentorship and guidance from investors who share invaluable industry insights.
What Are The Risks Associated With Seed Funding?
- Startups may have to give up some equity against seed capital, especially in the case of angel investments.
- Even after raising seed capital for a great idea, it does not guarantee success for the startup or promise a lucrative return to an investor.
- Giving up on equity in exchange for seed capital to an investor means giving up on some decision-making power and control. This could cause conflict within the company if the investor and the founder are not on the same page.
- A seed stage startup may have to give up on profits to repay debt to the capital borrowed. This means the company is not as profitable as it could have been if it did not have to part with the profits.
- When these startups raise external funding from investors, they are pressured to deliver quickly. With funding comes pressure to deliver to meet the investor expectations to grow quickly and meet targets. This can cause burnout and impact the growth of the business.
How Do Investors Evaluate Startup Opportunities For Seed Funding?
Industry experts consider investing in seed stage startups risky, but it also holds the potential for significant returns and the opportunity to become a unicorn and go public. Before diving into seed investing, investors carefully evaluate key factors to mitigate risks and maximise return on investment.
Business Model Assessment: Investors thoroughly analyse the startup’s business model, evaluating its viability, market opportunity, competition, and the problem the product/service aims to solve.
Financial Soundness: Investors delve into the startup’s financial plans and projections, scrutinising factors such as cash burn rate, runway, and revenue-generating potential. They look for red flags that could indicate economic instability.
Team Evaluation: Seed stage investors pay attention to the startup’s team, assessing leadership qualities, skills, and relevant experience necessary for driving the growth of the business.
How Can Startups Prepare For Investor Pitches To Raise Seed Capital?
To prepare for a seed funding round, startups have to first pitch their ideas to investors. Founders can start by researching and identifying potential investors who align with their startups’ goals and needs.
They should consider factors like investor type, experience working with startups, funding capacity, expertise and compatibility. Based on the information, prioritise and rank the investors based on their fit and potential for a long-term working relationship.
Now that the research on potential investors is done, founders can create a concise and compelling pitch deck that effectively communicates the startup’s story. Highlight the product or service, market opportunity, and your team’s background. Create charts, graphs, and detailed financial projections to support the claims.
Once the pitch deck is created, founders can send or present, depending on the meeting, the pitch deck to potential investors. It is important to maintain a professional yet friendly approach and create the pitch as per each investor’s preference.
If the deal materialises, founders should not hastily jump into the offers. They must take time to evaluate investment offers and consider the long-term implications they may have on the company. Founders can also come up with a counteroffer after thoughtful consideration. Negotiate strategically and ensure all agreed-upon terms are in writing to avoid potential misunderstandings.
What Is The Current State Of Seed Funding In India?
What Happens Post The Seed Funding Round?
It is a milestone moment for a startup if it receives seed funding. Startups can deploy the fresh funding to execute and strengthen their business model, open new revenue channels and hire more talent to scale and grow.
Now, the next goal is to find the right product-market fit. Once this is achieved, the startups can seek VC funding to scale their businesses further.
