Before proceeding into later rounds of fundraising, referred to as series A, B, C, and so on, businesses must first secure seed funding. Investors give money to your startup in exchange for a share of your business.A new company’s first capital typically comes from friends and family or from the founders’ savings. As a matter of fact, 77% of small enterprises initially rely on personal funds.
However, the money in your personal bank account as well as that of your friends and relatives will usually only go so far. Aspiring startups will soon have to look for other funding sources. While some early-stage firms may be able to obtain bank loans, obtaining seed money is typically a preferable option.
What are the advantages of seed funding?
Of course, seed money helps your firm immensely financially, but having investors in your corner implies that you get more benefits than just money.
Investing in an unknown firm carries a high risk for investors. The fact that your investors will be prepared to take on that risk and comprehend it is one of the main benefits of seed funding. Additionally, you will gain from the experience of your investors, who might point you in the direction of business development and growth that you might not have otherwise considered. Additionally, you will have access to and profit from the robust business networks that your investors usually possess.
Another benefit is that seed capital usually comes with no debt and is flexible, so you won’t have to worry about taking out loans or signing contracts.
Who invests in seed rounds and why?
A high net worth individual who is driven to make risky investments is the classic angel investor. Angel networks are groups of angel investors who pool their resources to make joint investments.
Investors may be wary of seed investment because your company hasn’t had much time to establish itself in the marketplace. Having said that, there is also opportunity. When a startup’s valuation is at its lowest, angel investors who choose to concentrate on seed capital rounds can buy a piece of the company’s ownership, and these investments can be quite profitable.
As example, Peter Thiel made a $500,000 investment in Facebook in 2004 and sold his shares for $1 billion a few years later.
Another popular class of investor that focuses on seed rounds are venture capitalists, or VCs. The distinction in this case is that VCs invest other people’s money, whereas angels invest their own. Or, as Y Combinator notes, the primary distinction between VCs and angel investors is that the former are professionals while the latter are amateurs. Angel investors are able to make decisions faster than venture capitalists (VCs), who usually need to hold multiple rounds of meetings before reaching a final decision.
When’s the right time to raise seed funding?
You can use seed capital as a financial catapult to demonstrate the viability of your business idea. Investors in the seed stage typically want to find companies that have a solid track record and a good fit between their product and the market. The seed phase is a great opportunity to show that your product or service can start to gain momentum in the market that you have targeted.
It’s critical to have those points very clear. It will be necessary to demonstrate how your product meets the needs of customers and how they are already using it.
Additionally, you want to have proof that your client adoption rate is rising over time. That’s a hint to possible seed investors that your business will yield high returns on investment, or it suggests a strong trajectory.
Startups have the option to raise seed money at different phases. Companies should seek to fund their seed round “when they have less than $3 million annual recurring revenue (ARR),” according to investor community StartEngine.
A seed round can raise as little as $100,000 or as much as $5 million, with an average of $2.2 million raised.
It is up to you as the founder to decide just how much money to raise. However, generally speaking, it’s advised that you try to earn enough money to easily meet your next financing milestone and/or become profitable.
Accurately assessing this calls for a thorough comprehension of your company’s operations and the precise steps required to reach the next milestone.
However, this does not always mean that you should raise the full amount of money available within the seed round.
How much equity should you give a seed investor?
Keep in mind the crucial trade-off between the amount of money you raise and the portion of your business that you provide investors.
The ideal situation is to “give up less than 10% of your company, while still proceeding to Series A,” according to Y Combinator. This isn’t always feasible, though, and losing out on 20 or even up to 25% of investment rounds is common.
How much revenue does a startup need to raise a seed round?
That is contingent upon the investor. The majority of venture capital investors want to see firms become profitable, which can be challenging in the beginning. Your concept, your experience, and your story might persuade other types of investors.
A startup can be in any stage during the seed stage, from being in the pre-revenue stage to earning several hundred thousand dollars a year.
Proof that people appreciate and desire to use your product is more important than income. Even in the absence of cash, social evidence such as reviews, mentions on social media, and media coverage can demonstrate the value that consumers have on your product.
The objective is to demonstrate to potential investors that there is a market for your product and that it can be profitably operated.
