Have you ever wondered what Seed Funding is? I know it’s probably the first question on your mind when starting a business and it may have been the reason why you landed on this page. Hopefully, I can answer all of your questions in this guide.
A right amount of financial assistance at the right time can do wonders in uplifting a small business and can have a monumental impact on its growth. Seed funding benefits growing or early-stage startups by providing them monetary support to help them transform into successful enterprises.
Basically, seed money or seed capital establishes a symbiotic relationship between the investor and the company where the investor receives an equity stake in return for the capital investment in the company.
How to define seed funding?
The concept of seed funding can be easily understood by an analogy of a human child, just like a child needs proper nourishment, nutrients, and care to transform into a healthy adult, similarly, a start-up needs financial help to reach its full potential.
For instance, imagine you launch a start-up in the education field, now to upgrade this business into a profitable enterprise you’ll need money to work on it and that’s where seed funding comes into play.
Why is seed funding important?
Imagine yourself planning to launch the start-up of your dreams, financial constraints are one of the first thoughts that will cross your mind. Now imagine a way that funds your business before your firm has even made profits! Sounds quite an unreal right?
That’s exactly what seed funding does, it equips you with the operating cash and scales up your business automatically. It successfully lowers the founders’ risk and covers mostly all the necessary expenses, ranging from marketing to hiring to business development.
Seed funding is often compared to equity funding which is a highly appreciated way for investors to provide monetary help to businesses in return for a share in the company. Both these funding ways act as a much-needed catalyst for budding businesses and can display monumental results in the future.
Prerequisites to take care of before getting into seed funding
Although getting seed funding is an uncomplicated process with minimal formalities but the younger generation just stepping into the start-up world needs to take care of some important aspects as mentioned below –
1. Financial expertise
While seed funding at a nascent stage proves to be a gateway to convert a business into reality, getting blindly lured by the amount of funding without weighing the necessary terms and conditions like investors say in the company, payment terms and returns might prove as a wrong move.
It is imperative that the investor has confidence in the company’s vision and invests solely because they trust the idea and the company’s plan. Make sure you are comfortable with the amount of stake an investor holds in your company or you might end up handing over your decision-making powers.
Thorough knowledge of your company accounts and balancing the income and expenditure graph can prove to be magical in safeguarding your business.
2. Legal understanding
Seed fundraising establishes a contract between the investor and the start-up and that involves a bunch of documents and contracts to be signed. So, to safely go through all the paperwork try approaching for legal help.
3. Raising seed funding
Raising seed funds isn’t a stress-worthy topic in today’s time. People are keen to work with unique business ideas and partner with creative minds. Entrepreneurs and business heads need to investigate the investor market thoroughly and go for the best options in terms of investor relations.
If you have an exceptional business idea that will blow people’s minds, then funds should be the last thing to worry about because in today’s era investment firms are well within our reach as compared to ten years back.
Your business idea should resonate with the source of funding you go for, for instance, if your venture doesn’t work well with debt funding then go for venture capital funding or even angel investors.
Make sure you are well known about the documentation and paperwork and have a perfect pitch ready to convince your potential investors.
Let us guide you to form a perfect pitch deck to woo potential investors with you business idea.
4. Preparing the most convincing pitch
Many businesses with the most creative and out-of-the-box ideas don’t make it to the market just because they weren’t put forward or presented in an impactful way.
The business pitch is basically the first impression of a business plan and it carries a lot of importance in terms of gathering funding as well as attention. Time invested in preparing a well-curated business pitch will be a giant leap towards success.
Know the investors you are presenting your pitch to, try and keep them occupied with the details they want to hear. Provide them with market research and engaging investment insights.
Establish a bond of trust and compatibility through your pitch and do not overpower the speech with heavy statistics and heavy words. Keep it as precise as possible and the inclusion of basic projections and arguments is a must-have.
Do not shy away or belittle your confidence if the investors seem distracted or ask you rough questions, you can always win them back with increased enthusiasm and confidence. Provide The investors with a holistic view of the business idea and answer all their arguments or queries with well-researched answers and statistics.
At the end of the day, what stays with the investor is a strong conclusion or an impactful ending statement. So make sure you conclude your pitch with the most enticing lines which lure the investor to invest in your venture even if he/she was disinterested before.
5. Amount of seed funding to raise
Most ventures follow the ‘more the merrier’ scheme when looking for fundings but what they fail to consider is that more funds are directly proportional to more equity stakes to the investor, so caution is the prerequisite before going for hefty funding.
The ideal way is to first evaluate your venture’s worth and then set a viable valuation for it because the investors are well equipped with the number game and your start-up’s valuation is the first thing that crosses their mind, so make sure you are informed about it.
The widely used way to determine a company’s valuation is through comparison with comparable companies i.e. valuation is estimated through a detailed comparison with similar companies in the market.
Start-up owners need to decide on the type of funding they will require, they can either go for seed funding to reach the growth stage or they can go for follow on rounds or investment milestones for them to work hard and reach the next investment goal.
Now, the other question that circles new businesses is what if the investors aren’t willing to supply them with adequate funding? The only answer to this is to establish their trust in your business plan and ask for the amount which is actually believable and deliverable.
If a fledgling entrepreneur makes intelligent decisions and obtains finances from a suitable source in the proper proportions with a well-planned repayment scheme, the funds may be put to the greatest possible use for the growth and development of the firm.
However, Obtaining initial funding from a third party may not always be the best option. It may result in the loss of corporate ownership, high-interest payments, and large dividend payments, as well as a loss of control over the company.