Seed funding or seed capital is a relatively small amount of money that is used to start a business, fund research, or develop a product.
In many cases, a person might take out a personal loan to fund a business idea. However, sometimes that isn’t a viable option, which is when seed funding might come into the picture. Family members, friends, crowdfunders, and angel investors usually provide seed funding in return for a share of equity (or ownership) in the company.
The term’s reference to a “seed” is quite fitting. A tiny seed can someday grow into a lush forest. A tiny investment can help a struggling startup grow to become a successful enterprise.
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How Does Seed Funding Work?
The seed funding process is highly similar to equity finding wherein investors shell out money in exchange for a stake in a business. Most startups, especially in the tech industry, often take this road to get their business gowing.
The amount of seed funding is highly dependent on the valuation of a particular startup since this is how most investors estimate their potential return on investment (RoI) before entering into a deal. These valuations can factor in a company’s growth track record, approach to management, market share, and risk level.
What Are the Different Types of Seed Funding for Startups?
Startups that wish to get seed funding need to understand the different types of investors they may deal with, which include:
One of the most popular ways to get seed funding is crowdfunding. Startups can choose from over 500 different crowdfunding platforms actively providing financial support for up and coming companies. Working with these platforms often means offering an idea or a product and waiting for interested parties to fund it. Some of the notable products backed by crowdfunders include Oculus Rift and Exploride.
Corporate Seed Funders
Another popular seed funding source is corporate seed funders. Startups with good products can take advantage of the opportunity offered by big companies like Apple, Intel, and Google, which are known to provide seed money for notable projects. These tech giants willingly shell out money if they know that a startup can be a good source of profit or talent for their pool.
It is also pretty standard for investors to make small investments and provide capital in exchange for equity in the company. These investors are called “angel investors” because they often save startups at risk of failing. They often create a network of fellow angel investors to limit their risks by dividing the capital investment among many different people.
Venture capitalists (VCs) are investors that provide money based on several factors. They are much stricter than angel investors when qualifying startups because they offer more significant amounts of capital. That’s why they often scrutinize a startup’s portfolio and growth potential before investing. There are also instances where VCs take a more active role in running and controlling the company.
How Long Does It Take to Get Seed Funding?
Startups planning to get seed funding should understand that getting money can take a while. On average, the seed funding process can take at least 3–6 months. This period takes longer for very new startups. Those that have received previous funding often take a shorter waiting time, but only if they were successful in their last rodeo. That’s why it is essential to complete all requirements early on and make fundraising a company-wide goal.
When Is the Right Time to Raise Seed Funding?
Considering that it could take a while to raise money through seed funding, startups need to know the right time to launch their campaign. In general, seed funding should begin when there is already a product that meets the target market’s needs. While this could be simple logic, this entails the following critical processes that need to be established before raising seed funding:
- Market study: Before launching a seed funding campaign, startups need to find out if there is enough interest in their product and if their business model will work.
- Customer profiling: Startups would have to know who their customers are, too. Building personas can help convince investors that there is a potential customer base. It would also add value if the startup could show that the target market is increasingly adopting the product.
- Product development: It would not be easy to convince people to invest in a startup without a finished product or an early version of it (prototype). Some startup founders may also only need to pitch their ideas to investors, but that rarely works unless the product is radically exceptional. For most startups, an actual product and excellent product demo are needed to show investors how it works and what problems it solves.
Knowing the right time to raise seed funding is essential to get the best results. Those listed above are only the general requirements, and they may entail more detailed tasks. The bottom line is that the right time to launch seed funding is when the startup can impress investors.
What Is the Difference between Seed Funding and Angel Investing?
There is not much difference between seed funding and angel investing, as the terms often overlap. After all, angel investors participate in seed funding campaigns, making angel investing part of seed funding. However, if there is one difference, it would mainly lie in the stage at which the investment is made.
Seed funding refers explicitly to the initial funding stage of a business venture. At this round, the potential investors are the founders, their families, relatives, and friends. As mentioned, angel investors also participate in seed funding. The goal of seed funding is to have enough money to hire staff and pay for the necessary office space and equipment.
Once the business has an established user base and consistent revenue, it can proceed to the Series A round of funding, which aims to expand the user base and product offerings. Angel investing still exists at this stage but doesn’t typically go beyond it (i.e., Series B, C, and D). As such, angel investing refers to funding beyond the first round and can continue through the Series A round. Either way, the pooled money is used to fund the business before it can generate profit.