Startups are known to develop innovations that change the lives of millions of people. But startups need financial support to keep themselves afloat in the cutthroat competition and continue their operations without compromising efficiency. Therefore, startups raise funds from external sources to improve and expand their operations, develop products, hire teams, market their product and put them into the market.
Based on the startup’s stage, they get seed funding to series F funding. This insightful blog by Velocity on seed funding for startups will answer all your questions about seed money, the sources to raise it, how to raise it, and many others.
Moreover, if you are not aware of seed funding meaning, you are at the right place. In this article, you will learn what seed funding is, how to get seed funding and common questions many founders and startup enthusiasts have about seed capital. Let’s get started.
What is Seed funding?
Startups often face financial trouble in their early stage. They often need to prioritize more important things, such as developing the core product, than marketing it or hiring more teams. Seed funding is the capital startups raise initially when they are at the idea stage or have a working prototype. At this stage, startups don’t have a substantial customer base, so they don’t generate any revenue. That is why seed investments are considered high risk, as there is no guarantee or proof that the business will work. The seed investors look at the business model and whether there is any growth potential in the idea to become a profitable business.
Seed investors are the people or groups who invest their money into startups after evaluating their growth potential. The seed investments are expected to yield exponential returns, but if the startup fails, investors lose all their money. From an early age, startups don’t have a functional revenue model, they can’t get debt financing, which is why seed investors take equity in return for their investments. Along with finance, seed investors also have experience in the startup world and help the founders navigate in the right direction. They help startups with mentorship, networking, business analysis, risk management, team hiring, and many other business fronts.
Why is seed funding necessary for early-age startups?
There are plenty of reasons why seed funding is essential for early-age startups. As startups at this stage aren’t generating any revenue, the seed investors invest the seed capital based only on the growth potential. Unlike traditional banks that offer loans to early-age startups with substantial collateral, seed investments do not require any debt or collateral. Take a look at some of the top reasons why seed funding is essential for early startups.
- The founders are not burdened with debts; the seed funding allows them to focus on their core vision, seek new opportunities, and fuel the company’s growth.
- Unlike structured loans from banks, seed funding doesn’t require monthly installments with a chunk of the principal amount and interest. The seed investor receives equity in return for their investments. =
- Seed investors are often the founders with successful exits from companies or high-net-worth individuals. They have years of experience in the startup ecosystem and bring that knowledge when they onboard as seed investors. Along with the finances, seed investors help startups on various business fronts such as market analysis, risk management, networking, go-to-market strategy, marketing, and many more.
How to raise seed capital?
Though it all might sound like a cakewalk, raising seed money for your startup can be challenging, mainly because there is no substantial evidence of how your idea will be transformed into a profitable business. Therefore, your idea must be a unique business concept that has the potential to be turned into a commercialized entity. The startup founders must outline a business plan, including market potential, target market segment, current, and potential competitors, and financial projections. At this stage, startups don’t generate any revenue. Still, they need to convince the seed investors how their business concept has the potential to generate revenue with the help of previously mentioned business documents.
Seed funding is undoubtedly a ray of hope for startups with PMF. The seed inventors bear the high risk and offer funds to startups that have great potential to be turned into profitable businesses. The seed capital allows the founders to be free from monthly installments of business loans to focus on their operations and lead their startups towards success.