What Is Seed Funding And How Does It Work?

Why Seed Funding Is Important?

• You have a brilliant idea for a startup. However, starting a business requires capital.
• You need to have an office, equipment, hire the best talents, and a lot more.
• All of that requires a considerable amount of money.
• Banks may be reluctant to finance your venture because you don’t have anything tangible to show other than an idea.
• You realise that the only thing standing between you and your dream company is funding.
• How do you marshal funds to bring your idea to fruition?
• Well, all hope is not lost because there is seed funding.
• Before a startup can be considered a truly established business, it goes through four stages of funding -

1. Seed Funding
2. Venture Capital
3. Mezzanine Funding
4. Initial Public Offering (IPO)

Seed Funding

• Seed funding is the process of raising capital to grow your business.
• It is the initial official money that your business raises.
• The money comes from a pool of potential investors comprising friends, family, banks, venture capitalists, and angel investors.
• Angel investors are more likely to pay attention to your business and provide financial backing.
• They are more inclined to invest in startups in exchange for an equity stake in the company.
• There is another stage before seed funding that you should be aware of, called the pre-seed funding.
• In this stage, you gather enough funds to start operations and set things in motion.
• You might not need a lot initially.
• You just need to have enough for the bare minimum essentials like office space, operating expenses, payroll, equipment, etc.
• The objective is to fund the initial setup costs.
• Generally, pre-seed funding is done by the founders themselves with a little bit of help from friends, family, and well-wishers.
• Pre-seed funding gives you enough traction to make your idea a living and breathing entity.
• Once your business is up and running and has a minimum viable product (MVP), you progress to the stage of seed funding.

Venture Capital

1. You approach venture capitalists once you have a product on the market, a user base, and a consistent revenue stream.
2. This round of funding consists of three or more phases.

Series A

The funding at this stage is considerably higher than the seed funding stage. At this stage, your startup might scale up operations into new markets. You formulate a plan to develop a long-term business strategy. Venture Capitalists look for great ideas and an equally great strategy to turn the business into a viable and profitable business.

Series B

You opt for Series B funding once your business is well established and you want to take it to the next level. By this time, your company has a sizeable user base and has a proven track record that investors can count on. With Series B funding, businesses aim to grow bigger.

Series C

If you are considering going for Series C funding, the chances are that you already have a successful business. Series C funding is primarily used to develop new products, acquire other companies, and expand into new markets.

Mezzanine Funding

1. Mezzanine funding is for startups that are financially secure, profitable, and have stable operations.
2. With mezzanine funding, startups aspire to accelerate their growth curve.  
3. This funding is typically done about 6 to 12 months before an IPO.
4. That is why Mezzanine funding is also known as bridge financing because it serves as a gateway to an IPO.

Initial Public Offering (IPO)

• Through an IPO, a company can raise more money by selling company stocks to the public.
• An IPO by a startup is considered a mark of success.
• However, going public does not guarantee future success.
• Companies with a solid track record are better prepared and suited to take the IPO route to raise capital.

Why Do You Need Seed Funding?

• Seed funding enables you to grow and expand your business.
• Before your product or service hits the market, you need to do extensive market research.
• You might even have to test the waters by releasing it in its early stage to gauge the response and gain feedback.
• This helps you pinpoint your target market and further refine your product.
• You would need a lot of resources to make that happen.
• Seed funding can come in handy at this stage.

What Are the Different Types of Seed Funding?

As a startup founder, there are multiple ways in which you can raise seed funding. Some of them are as follows -

1. Crowdfunding: It is an increasingly popular way of raising seed funding. Crowdfunding has made it easy for anyone from anywhere to invest in a startup or raise funds for their startup.
2. Incubators: Incubators help startups by not only providing seed funding but also a workspace, mentoring, and management training. Some of the notable incubators in India include Khosla Labs, Angel Network Incubator, and T-Hub.
3. Angel Investors: These are investors with an appetite for risk. They offer to fund startups in their infancy. Some top angel investors include VC Karthic, Sanjay Mehta, Siddharth Ladsariya, Sharan Aggarwal, and Sachin Tagra.
4. Angel Networks: These are investors who come together to invest in startups with promising ideas. AngelList, Indian Angel Network, and Lead Angels are some major angel networks that back startups in India.
5. Corporate Seed funds: These are the investment arms of big technology companies that fund startups. Being funded by corporates provides a lot of visibility, not to mention the publicity that comes with it.

How To Raise Seed Funding?

1. Raising seed funds is easy.
2. Said no one ever.
3. When you go out there to meet potential investors, you need to arm yourself with a compelling business plan.
4. Have your projections and hard numbers at your fingertips.
5. It is also good to know your audience, that is, familiarise yourself with how startup investors make their investment decisions.
6. Here are a few tips on how to go about it.

• Research the seed fund market.
• Figure out who to approach
• Network and build relationships with investors
• Seek an appointment with potential investors
• Create a pitch deck and practice it
• Include projections and justifications in your pitch
• Get used to getting rejected.

Why Should You Make A Killer Pitch Deck?

• A pitch deck is a presentation that gives a brief overview of your business.
• You need to have a solid pitch deck when you present your ideas to potential investors.
• If you can’t get an investor to take you seriously, there is no question of investing in your business.
• To convince investors to invest in your idea, you need to have a highly persuasive pitch deck.
• Pitching your idea to investors can be an exasperating experience.
• However, with a great presentation deck, you can grab their attention and garner interest in your ideas.

Here are the components of a great pitch deck.

1. Brief introduction about your company
2. People behind the idea
3. The problem you are attempting to solve
4. The solution you are offering.
5. How your product works to solve the problem
6. Traction or current sales to show potential
7. Size of your target market
8. Information about competitors
9. Business model
10. The planned budget for your venture

How Much Money To Raise With Seed Funding?

• The seed capital you need for your business depends on the scale of your business, the type of product, market size, operating expenses, expansion plans, and your vision for the company.
• You should factor in all of these before coming up with a projected figure.
• Ideally, whatever you raise should be enough to run your business smoothly for at least 12 to 18 or until it becomes profitable.

Conclusion

90% of all startups fail because of budgetary constraints. That is why it is crucial to have sound financial backing before you launch your startup. And you can achieve that by raising seed funding.

With a strong foundation, you are not bogged down by the hurdles presented by inadequate capital. And you can focus on what you do best - build your dream.

Lastly, raising seed funding is a process that takes time. You might end up spending days and months trying to secure financing without any guarantee of success. As cliche as it may sound, persistence is the key to seed funding success.

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