Getting a startup off the floor isn’t easy. Most of the time it starts with an idea. But working with an idea and putting it into work requires funds. The question is where will you get the initial fund? This is where seed funding comes in. In this article, we will look into the details of seed funding and everything you need to secure one for your startup.
What is seed funding?
Seed funding is essentially the first cash inflow in a startup in its initial phase. A startup has several stages. The initial phase is idea generation. Based on the idea, the startup moves into the market viable product. Subsequently, the product or service sees expansion, growth, and maturity phase. While a business can easily get large-scale investment from the expansion phase, there are significant R&D and market compatibility investments that require funding.
These investments come in the form of seed funding. A seed investor is also known as an angel investor. To know more about angel investment, you can read our comprehensive guide here.
Seed funding is unique because there is no practical proof that the startup will be profitable or scale-able. An angel investor will invest based on the uniqueness of the idea and their experience as an investor.
Almost all the large-scale startups of today had seed backup. The initial money needed to bring the startup to profitability is well beyond the means of its founders. Seed money not only ensures maintenance of business process but also makes sure there are multiple trial and error run for your product and service.
Considering the market competition and overall success rate of startups in the world, it's understandable why a startup would not be a single shot thing. Rather it’s about having a tried and tested model to achieve the ultimate goal. Seed fund allows you to try out and test different approaches which would’ve otherwise been impossible.
Things to know before getting seed Funding
The basic groundwork
An angel investor or seed funding is done at the earliest stage of a startup. Most startups that apply for seed fund doesn’t even have a market viable product. To get seed funds, you need to clearly outline your idea. The entire process is nothing but making a potential investor see your vision with the startup.
During the basic groundwork, you need to show potential investors whether the product or service has market demand or not. How will it undercut your competitor? What’s the chance that people will adapt to the product rapidly and how does it solve an existing problem? This simple market research will act as the groundwork for the seed fund approach.
Whether the startup will get the attention of a potential investor depends largely on the word-of-mouth spread of your business. Networking and connection building are equally important to having an impeccable pitch deck. Developing networking and connections will help you come in contact with potential investors and give your startup better exposure in the startup community.
What is the ideal seed amount?
Many startups make the mistake of overestimating their business. As a result, most of them fail to secure funding. Before diving into the details of how much is actually the right amount, you need to understand that there are multiple types of investment.
There is discounted cash flow which generates a steady inflow of investment rather than a lump sum. There is the market comparable method where the pattern of investment on a similar startup is followed. Then comes the venture capital method where an exit strategy is worked out before investment.
Regardless of the investment, you’re choosing, it’s important to have a proper valuation of your business. Every startup has several investment cycles before it hits the maturity phase. Seed funding valuation is generally less as there is no proven market strategy associated with the product.
The essential documents
An investor would always look for how organized a startup is. And the first step of organizing starts with the preparation of all the important documents. The documents include a business plan, executive summary, presentation deck, elevator pitch, and the NDA. All these documents are necessary when it comes to securing investment. The more organized you are, the easier it becomes to present your ideas professionally.
Every established business has its own set of strategic and organizational goals. As a startup, you should have your own goals and milestones as well. This is one of the reasons why a strategic business plan is so important when it comes to startups. Your investors will be looking for results from their investments. You need to outline a clear set of milestones to showcase the growth trajectory of your startup. As long as you stick to the milestones, it will help your business grow uniformly and attract investors as well.
Always be ready to scale
We mentioned the cycle a startup goes through in its initial days. Truth is, the seed period of any startup is short-lived. A startup with proper planning and business model will soon be ready to scale. It always starts with a sudden boom in sales or service requests. If you aren’t ready to serve every client proficiently, you stand to lose your reputation in the process.
The increased demand will initiate increased service requirements. So be ready to scale your business with part of the seed funding in the initial stage.
Understand what you’ll give up
Seed investments aren’t different from traditional investments considering you will give up a part of your stakes to get the funding. There will be multiple stages of fundraising so you have to be careful how much you are staking out in the seed stage. This will also impact how much control you hold over the startup in its growth phase.
Seed funding is a necessary and intricate part of any startup. However, many startups die out in their initial phase due to a lack of funding. In this article, we tried to focus on the core aspects that will help you ensure seed funding and control over your startup.