The earliest stages of business creation can be confusing and appear like they’re full of Catch-22s. How do you raise money if you have no track record as a business proprietor? How can you demonstrate that you’re a good investment if you have no product? Where's the money designed to originate from?
Well, that’s where seed funding is available in.
What Is Seed Funding?
Like many buzzwords within the entrepreneurial investing world, seed funding is a term that may be used interchangeably with some others and, based on whom you ask, comes either soon after the angel investment phase, or concurrent by using it.
So what is seed funding? Seed funding could be any amount of money, from any source, that can help move a business in the conceptual phase to the implementation phase. Seed funding is usually a tiny bit of money relative to the scope of the business proposal and frequently comes from personal sources like friends and family.
What differentiates seed funding from a loan — or even charity — is that you’re usually offering equity or perhaps a share of profits towards the funder (so your step-mom might be a shareholder. Proceed at the own risk). Additionally, seed money is accustomed to prepare a business for future rounds of equity financing from venture capital and similar sources.
Note, however, that it's possible, if uncommon, for venture capitalists to offer money throughout the seed phase.
How Seed Funding Works
From the investor’s point of view, even when they are your best friend from senior high school, clients meet to get equity they can eventually liquidate.
In short, it’s meant primarily for companies that want to make an IPO or sell within a relatively short timeframe (figure around six years). When compared with future phases of venture financing, seed funding will typically maintain lower amounts and from non-institutional financers. Your seed funders can literally be anyone. You’re also likely to have more of these than you will investors later on stages of financing. Raising seed money helps demonstrate to venture capital groups that you’re able to generate confidence inside your idea.
The exact amounts you can raise will vary by business, with bigger, more complex ideas requiring larger amounts of seed money. Specifically, that means you are raising enough money to help you get for your next funding milestone. Typically that'll be a year to some year-and-a-half after implementing your idea.
Remember that you're selling bits of your business. You’ll need to sell much more of it later on phases of financing, so you coping a finite resource. Ideally, you’ll want to sell very little of it as you can. Based on YCombinator, you’re probably taking a look at selling around 20% of your company throughout the seed round. If you’ve a lot more than 25% within the seed round, you may have issues in future rounds of financing. If you’ve managed to sell only 10%, you’re a business demigod and could likely have a fall-back career as a hostage negotiator if this entrepreneur thing doesn’t work out.
Seed Funding VS Series A Funding
Seed funding comes prior to Series A funding.
In fact, the point of seed funding would be to help you stay going of sufficient length to be ready for Series A funding.
Series A is the first phase by which investment capital begins to kick in, assuming things are running smoothly. You’ll use your seed money, plus any angel investment, to build a prototype of your service or product and create a solid strategic business plan to the investors you’ll be presenting to during Series A. As compared to the seed phase, you won’t be petitioning family, friends, and neighbors so much as investment capital groups and investors with deep pockets.
During Series A, you’ll be raising money to grow your operations, hire personnel, and scale-up production with the objective of monetizing the product or service. The typical successful Series A round in 2022 raised around $15.6 million.
Seed Funding VS Angel Investors
This one’s a little more confusing. That’s because private investors can be considered a source of seed funding. They’re just not the only supply of seed funding.
Angel investors are wealthy, accredited investors who offer cash infusions to startups, typically in exchange for equity. They’re differentiated from vc's for the reason that they tend to do something as individuals instead of as a part of a group that pools its resources. They can also get involved during any phase of economic development, whereas investment capital has a tendency to take place in a more regimented number of fundings. Private investors could also offer debt financing instead of equity financing, particularly if the amount of cash being borrowed is low.
So technically angel investing can occur before, during, or after your seed funding phase.
How To obtain Seed Funding
The response is simple if frustrating: Anywhere you can. Actually, you — yourself as well as your business partners — may be a supply of seed funding. Remember if you’re using the route of equity financing, proving that exist people to believe in how well you see enough to provide you with cash is a fundamental part of showing vc's that you simply mean business.
Your personal networks –friends, family, acquaintances, neighbors, even coworkers– are low-hanging fruit for seed funding, just be sure you be truthful together by what you’re doing and what the risks are, or you’ll risk straining your personal relationships. Once we touched on above, angel investors are also a potential source of seed funding. They may be elusive, but networks like AngelList can at least help you determine where they are.
A more novel supply of seed funding might be equity crowdfunding. This isn’t Kickstarter, where you’re essentially frontloading sales. Instead, you’re petitioning online masses for money in return for, you guessed it, equity in your business. These types of services are relatively new and therefore are the subject of much debate and analysis in the investing world, but when you’re not lucky enough to get live in an entrepreneurial hotspot, they might be a method to raise money remotely.
Learn About Other Financing Resources For Entrepreneurs
Seed funding is simply one small a part of equity financing and an even smaller a part of startup financing in general. If you wish to learn more, check out a lot of our other helpful information on entrepreneurs.
- 6 Financing Choices for Up & Coming Entrepreneurs (Plus 4 Expert Funding Tips To Get You Started)
- SBA Loans For Startups: Types, Terms, & How To Apply
- How Much Money Do You Need To Start A Business?
