What is Seed Funding
As its name implies, seed funding is an investment at the very early stage of a business. Learn more about what seed capital is, its purpose, and how to find one.
What do the majority of startups and growing small companies have in common? They all have brilliant business ideas. On the other hand, most of them also have the same problem: the lack of funds to sustain their growth. Hence, most of these businesses engaged in a series of external funding activities called startup funding.
Seed funding is one of these activities. This type of capital funding happens at the onset of the business. Startups look to secure seed money for the following reasons: to finance the start of their business, do research, or develop products. Seed funding is crucial because 90% of startups fail, and one of the most common reasons is the lack of capital.
So, how does seed financing work? The following sections will discuss more about this type of funding.
How Does It Work?
Seed funding is a type of business financing that is equity-based. This means that investors shell out money to startups that they assessed to have a higher valuation. Investors determine how high the valuation of a startup is by examining their growth records, risk levels, management approach, and other factors.
Often, seed funders have very in-depth knowledge of what type of business they want to invest in. They also need to have resources to assess the company’s leadership potential.
Why Is It Important?
Imagine startups as seeds. They need suitable soil, water, and atmosphere to grow. Similarly, startups also need to finance to grow to their full potential. Hence, the process of seed money is crucial for them. Below are benefits that this type of funding will do for a company:
- Covers fund insufficiency
- Secures working capital
- Accelerates growth
- Enhances scaling up
- Reduces financial risks and burdens to the founders
- Provide platforms to build business relationships through strategic partnerships
Different Types of Seed Funding
Entrepreneurs who are looking for seed capital need to know and understand the various kinds of seed fund investors:
One of the most popular sources for businesses to find seed financing is crowdfunding platforms. There are over a hundred crowdfunding platforms that entrepreneurs and company founders can approach. These crowdfunders are actively providing seed capital for promising businesses.
2. Corporate Seed Funders
Corporations such as Intel, Google, and Apple are also good sources to find seed funding. These large companies willingly invest in business ideas that they assess to have high growth potential and talented personnel in their pool.
3. Angel Investors
They are called “angels” because they save startups that are at the risk of failing. Angel investors provide seed money to provide the said companies the means to fulfill their business ideas. In exchange for their investments, angel investors will ask for shares of the company ownership.
Also called seed accelerators, they provide new firms with resources to scale up their businesses. Accelerators help these firms improve their services through mentorships and other programs.
Incubators are organizations that help newly-formed companies. They help startups access the much-needed seed money through their relationships with investors and financial planners. Also, they provide them with other resources such as mentorships, office spaces, etc. Most of the time, incubators are non-profit organizations. Hence, they don’t ask for equity for the investments they make.
6. Venture Capitalists (VCs)
Venture Capitalists invest in new firms that they deem to have high-return profiles. They assess startups for their marketing potential, growth potential, scalability, founder’s vision, and more.
Being the founder, you are seeking the value of your business. However, investors, especially early-stage funders, are looking at the potential of your business idea.
Therefore, you must know the value of your company before looking for funding. By determining the value of your business, you are prime to undergo seed funding activities.
Aside from having a business idea, startup founders need more to convince seed funders to invest in them. First, to be able to pitch your idea to investors, you need a detailed business plan. Your plan must include your business target market segment, market trends, financial projections, and more.
With your business pitch on hand, you are now ready to seek seed funding through the following funding series:
1. Pre-Seed Funding
The funds are usually provided by families, friends, business promoters, and the likes during this stage. The funding that you can get in this stage may be substantially smaller. However, it will provide you with the resources to cover the initial costs of starting a business.
2. Seed Funding
In this stage, you need more capital for product research and development, hire personnel and more. This is where you start to meet investors. In exchange for getting seed capital, you will give a share of your company to the investors.
3. Series A Funding
After getting past the seed funding stage, investors will now demand more than just your business idea. In this stage, you have to provide long-term business strategies to attract longer-term investors.
Series A funding is where established venture capitalists and other investors will notice your organization. They will offer you resources to scale up your products in anticipation of rapid sales growth.
4. Series B Funding
If your business qualifies for Series B funding, it means that you have successfully made it out of the development stage. This also means that your product offering is now visible in the market. And, Series B funding will provide your business with the finances to increase your market share, coverage, and personnel.
5. Series C Funding
Companies that are looking for Series C funding have already established themselves. Meaning, their products have consistent user base growth and history of growth. They need more funding to accelerate their growth. With proven potential and lower risks, more institutions such as investment banks, private equities, and hedge funds get more involved.
Get Your Business Ready for Funding
Getting that much-needed funding can be very difficult for a founder. But never give up. As long as you pitch your business clearly, investors will be willing to provide you with seed funding. It is important to have your product ready for scrutiny to convince investors that it has high growth potential.
This is where Full Scale comes in. Our talented and experienced software engineers, programmers, developers, testers, and digital specialists are on top of their fields. We will work with you to build the best team to develop your applications at the highest standard. Furthermore, our founders, Matt DeCoursey and Matt Watson are serial entrepreneurs with years of business experience. They are known to mentor fellow entrepreneurs to help their startups grow.
Are you ready to scale up your business? Contact us today and we’ll discuss how we can help you.