Every business starts with an entrepreneur and his great idea. But to thrive, these businesses need sufficient funds. Not only do booming startups need money to build a solid foundation, but they must have funds to cover everything from marketing to hiring staff. So how can startups generate this well of cash?  

Seed funding is money that can come from any source. Unlike loans, seed funding generally doesn’t need to be returned. 

So here’s a quick know-how about seed money, types of seed fundraising, its importance and the best timing to procure it.

What is Seed funding?

If you are thinking about seed funding for your business, you first need to know clearly what it is and how it differs from other funding options.

Businesses that seek out seed funding are the ones that have already proven a market need for their product. They need the funds to get that product to market and establish a foothold in their industry.

One of the greatest distinguishers of seed funding is that the investors are not providing loans. Instead, they expect a share in the future of the company. So, entrepreneurs embarking on the quest of generating seed funds must be comfortable giving away part of their business.

The importance of seed funding for startups

What is seed funding’s purpose? This question may constantly come to your mind. Well, startups, by their nature, are seeking to grow at a faster pace. Without funding, almost all startups will fail. The length of funding required for an entrepreneur to establish in a market typically overshadows anything friends, family, or traditional financing options can provide.

High-growth companies must burn through the capital to achieve profitability and long-term staying power. While some startups have never taken external investment, they are the exception, not the rule.

A quick cash injection allows new businesses to get off the ground and survive. Remember, startups often compete with profitable, established companies with funds in reserve. Without that capital, a startup begins with a crippling disadvantage.

Seed fundraising is demanding and typically requires a lot of effort and time. The process is arduous and complex and involves a lot of setbacks. If you’re feeling discouraged, remember that most successful entrepreneurs have gone through the same process, which is part of building a business.

Now that you are clear on why you require seed funding let’s explore and get familiar with different seed funds.

Types of Seed Funding

A seed investment can take many forms. Different startups are suited to different types of seed fundraising options. Therefore, exploring every avenue and knowing them helps determine which option is the best suited for a business.

There are ten primary ways to obtain seed funding. Here’s a quick summary of all of them.

Crowdfunding

It is the method by which startups raise small amounts of funds through a large number of investors via fundraising campaigns. More than 500 crowdfunding platforms exist presently and are popular because anyone can upload their project there and invest in it worldwide.

Corporate Seed Fund

Getting a better perspective requires powerful support. MNCs invest in startups as a primary resource for talent, profit, and intellectual property.

Accelerators

These investors concentrate on helping startups scale strategically rather than jumping in at square one. They help in the form of mentoring, networking, and providing workspaces.

Incubators

Incubators offer smaller amounts of seed capital. They also offer office space and training courses. Incubators typically don’t take equity.

Angel Investors

They typically provide seed funds in exchange for ownership equity. Such investors fund startups at the difficult initial stages. Hence such investments are risky.

Angel Networks

It refers to investors who team up to form angel networks or groups and invest small amounts in new ideas or startups at the initial stages.

Convertible Securities

Convertible securities start as loans and then change to equity or shares based on how well the company performs.

Bootstrapping

Entrepreneurs use their wealth to relieve financial pressure and avoid taking on debt or giving away equity.

Venture Capitalist Funding

Venture capitalists are the investors that implement several metrics, such as current market conditions and growth potential, to determine whether to provide funds. In return, they take a portion of the business and participate in multiple investment rounds.

Thus, when asking, “Which seed investor to go with?” the answer is that it can take many forms. But ultimately, they all differ slightly, and entrepreneurs need to seek an arrangement that benefits them and their prospects the most.

When should you seek a seed investment?

Timing is everything in business, especially for new companies. It applies to participating in a seed round the same way as anything else.

Unfortunately, there is no perfect timing for seeking outside investment. Instead, it depends on the founder and the investor. What matters most is an investor writing off a check when they feel the business proposition is compelling. 

Some can win funding just from their previous reputation alone. Others need an exciting and promising idea. Still, some entrepreneurs must prove that some customers have already bought their products.

In most cases, something more than a product alone is required. Founders must provide a product that fits into the market and shows strong growth potential.

Ideally, you should seek funding only after proven rapid growth. How much rapid depends on the investor. This is why obtaining seed funds is a tricky process.

Tips for selecting the right seed funding investor 

Let’s proceed to the next aspect, which is how to find that ‘right’ investor. When a business is in the startup phase, entrepreneurs tend to say yes to anyone who offers the funds they need. This step can prove a big mistake because not every investor is the right fit for their startup. So it is natural to get apprehensive about getting adequate funds, but falling into the trap of a wrong seed money investor might result in the rapid downfall of the business. This is why choosing the right investor is of utmost importance.

Below are tips to help first-time founders and startups find the appropriate seed capital investors.

The Business Type

The first step before choosing an investor is understanding the business model or type of business the startup wants to undertake. Many seed fund investors in India and across the globe have specializations in particular industries, which is why they can offer expert advice in the corresponding segments. Hence, approaching investors whose interests match the business proposition is essential. This way, apart from the capital, investors will also be able to offer guidance and support.

Trustworthiness

It is vital to have those investors by the side of the startup founder and get them to trust and believe in the idea. It is a well-known fact that during the initial stages, a business goes through many ups and downs; hence, finding seed capital investors who won’t leave the startup by the wayside during tough times is of utmost importance.

Capital Needs

During the process of finding seed investors for a startup, founders cannot have any doubts about the capital requirements. Different investors can bring varying amounts of funds to the table, so it is essential to consider the business requisites. For instance, angel investors can typically invest less than angel groups or venture capital firms.

Problem-solving

When a business is in the nascent stage, apart from adequate funding, it also requires proper feedback and advice from someone experienced in the field. While many seed-stage investors in India might be willing to invest in startups, only some can offer priceless guidance for solving current problems. So startups and founders need to find those investors who are experienced and have a strong network, as this will prove valuable in the long run.

Ability To Fund

Finally, in the Indian context, knowing whether an investor has adequate funds to invest in the idea is crucial. Recent taxation changes have put a lot of pressure on angel investors from this point of view. If the investor’s financial health is not good, they will be under tremendous pressure, which will also flow down to the startups they invest in. Therefore, choosing an investor capable of conducting different funding rounds is best.

Mistakes To Avoid While Choosing Seed Investors

Any investment is crucial for a startup, but seed investors set the tone for the rest of the business life cycle. 

So you need to remember these things while picking seed investors:

• Founders of startups must avoid overvaluation or undervaluation of their businesses. 
• Before looking at and researching the investor ecosystem, it is best to calculate the amount that will be sufficient to facilitate a smooth business runway. 
• Take your time while selecting seed investors. It is better to be patient and select those who have adequate funding and are willing to assist in future fundraising rounds. 
• Start with a low target and increase the same if and when possible.

Conclusion

There is no doubt that seed investors are essential for every startup. However, with a host of seed investors in India, it is becoming difficult to choose the right one. This is why founders and startups must conduct thorough research and consider all the above pointers before approaching anyone with a concrete plan and business pitch. Always remember that a good relationship with investors can significantly improve the growth and success of a startup.

Understanding seed funding can help take your startup from an idea to a global organization capable of changing the world. However, with fundraising, preparedness is crucial.

That being said, even with the most preparation in the world, you’ll likely experience setbacks. However, it is part and parcel of doing business. The good news is that the world offers immense opportunities, and there is always one way or another you can thrive and establish your business.