No matter how noble or helpful an idea is to society, it can only be brought to fruition with money. Despite how necessary it is for the future growth of early-stage companies, raising funds can be one of the most difficult tasks to achieve. You have to find people with money, and convince them that your business idea is worth something, and even more, that it is worth their money. That is a lot more work than it sounds.
Seed funding is money required during the very early stages of a company which means you don’t have much proof yet. So, how do you acquire the funds still? How do you find potential investors and convince them to take a chance on you?
In this article, we will cover the what, how, and why of raising seed funding for early-stage companies.
What Is Seed Funding?
Seed funding, also known as seed capital, is the money needed between the conception of a business plan and the time when it is executed. Seeking seed funding is a crucial step in the early stages of any startup. Seed money may come from family and friends but it can also come from investors in exchange for an equity stake in the business venture.
While it is a beautiful thing to get funding from investors during this stage, it is not easy. This is because your business doesn’t have much to show yet and investors won’t take such a risk unless there’s enough potential. Money from your average seed round isn’t usually exorbitant since it is only needed to carry out the initial goals and hopefully, have something to put on the table when you sit down with potential investors.
So, the most common way to raise money for this is usually through personal savings and acquaintances. Even so, you can’t just rely on your relationship, make sure your friends believe in your idea enough to hedge their bets on you.
The Importance of Raising Seed Funding for Early-Stage Startups
Apart from the fact that you need money to execute an idea, why is seed funding so important to a business in its early stages?
Paves The Way
Seed funding is like word from a famous influencer. Once it becomes clear that someone deems it fit to put some amount of money into your business, it gives other investors the confidence to forge ahead and take the risk too. No one likes to be the first to take a risk but by getting seed funding, you can prove that other people find the risk worth taking and nothing is more reassuring than that.
In addition, it is a vote of confidence for a company in its early stages as well. It strengthens the belief they have in their business once they can pull off that first seed round.
Gives Trendsetters The Go-Ahead
It’s one thing to create a product that is in demand in the market and it is another entirely to make a ground-breaking innovation. While there’s hardly anything that hasn’t been conceived under the sun, there are so many things that haven’t been innovated. So, for a business that has made an earth-shattering discovery and a never-seen product, a successful seed round can be the most necessary thing.
Apart from proving that the idea isn’t just a wild goose chase, it boosts their morale and gives them the gusto to keep creating solutions to problems in society. It is especially better if a venture capital firm funds the first successful seed round.
Entrepreneurs are bound to take risks but with backing from investors, they become less alone and can now explore their minds to wider capacities. Imagine if you have all the greatest ideas but all your ideas need money. Now, imagine if one of the richest men in the world assesses your idea and invests his money, proving that they think it has potential. Wouldn’t that gear you up to keep doing what you do best? Hence, seed funding not only eases the minds of investors but startups as well.
Solidifies The Business Plan
Before you get someone to provide seed funding, having conducted market research, all you need is a minimum viable product and some milestones to hit. However, the whole purpose of the seed stage is to expand the business beyond its current capacities.
So, after the seed stage, you need to put your products out on the market and revise the business plan with the times. Angel investors can help you with this if they are involved in the funding rounds. Since they are usually more experienced, they can assess the growth potential and financial projections, and advise you on ways to improve the company’s growth.
Provides Networking Opportunities
If you are lucky enough to get venture capital funds, your startup growth will be well-rounded because venture capitalists often host networking events where you can meet up with like-minded people and owners of businesses that have gotten to where you hope to be.
It may not be exclusively mentioned as part of your seed funding deal but venture capitalists and angel investors have rich networks that you can build on and take advantage of to expand your reach. Don’t wait for your seed investor to tell you everything, you have to be proactive and willing to engage with the necessary people at these events.
Gives You What You Need
Be it equipment, expensive software, or protection of your intellectual property, it’s never too early to do it at the seed funding stage. If you are using your money, it may not be feasible to get all you need. However, with venture capital funds, you need to work smart and get as much as you can from the funding round.
Of course, there will be more funding rounds after that but the seed stage is crucial for getting the important resources. If you don’t get what you need, you may be unable to provide the necessary results for the next round. Seed funding is like a foot in the door and when venture capital investors see that, they will most likely come back for more during subsequent rounds.
How to Raise Seed Funding
Depending on how much seed funding you need, there are several ways you can get it.
Angel Investors
These are private investors interested in adding to their portfolios. Angel investors usually provide seed funding in the form of convertible debt which means the seed money can be converted into shares. They invest money in return for a share of the company. The value of said company, however, isn’t decided until the next funding round. In addition to funding for startups, many angel Investors also offer advice and mentorship.
Hedge Funds
This is a private investment that takes money from large companies and individuals with high net worth. It won’t be easy but it will be worth it.
Venture Capital Investors
These are investors from financial institutions called venture capital firms whose job is to find promising startups and give them financial aid and expert advice. Venture capital investment is good for seed funding because it looks promising to other sources.
Crowdfunding
As the name suggests, this is a means of getting investment money from a crowd of people who for whatever reason want to help your cause. There are crowdfunding sites where you can launch your campaign and state your project’s fundraising goal. Crowdfunding can be a way to launch your initial public offering in that you can get money for an equity stake in your company.
However, you can also get money for free in donation-based crowdfunding, although it is an uncommon way of getting funding for startups. In a reward-based system, early investors can get small incentives. For a successful seed round, you need a solid plan and adequate publicity in your target market.
Corporate seed funding
This is funding for startups from bigger companies that are already far ahead but are looking for fresh ideas and new talents. They can be a part of your fundraising process.
Personal Savings
You can also get capital investment from your savings. Whether you can raise money from outsiders or not, you can never go wrong with your own money. Speaking of which, you can also leverage your personal network to get the word around and also get some money in. Again, your acquaintances can be your seed funders as is the case for most startups.
Conclusion
The seed stage is one of the hardest for early-stage startups. You have to worry about money, presenting your business concept, protecting consumer interest, how much of a product market fit your idea is, and satisfying both yourself and your investors. But it is not impossible. So, in this article, we have told you why it is important and equipped with ways to get started. In no time, you’ll be raking in the investment capital and making it big in the market.