A business has its own life stages, very similar to that of a plant. Just as a seed needs proper care and watering to sprout into a plant; a startup business needs the nurturing of finance to explore and grow. The funding done at the nascent stage is called seed funding and the capital is known as a seed capital.
Technically, seed capital is the initial capital used while starting the business. This capital can come from founders, friends or families. However, many people mistake seed capital to be the fund needed to simply cover your initial office expenses and avoid the use of personal cash. Seed funding has a lot more to it than what meets the eye. It is required for the early expansive market research, product development, and other initial stage operations.
Seed funding allows you to explore the business idea and transform it into a viable product or service that further attracts venture capitalists. It is the ground work you do for your Series-A funding. A business founder must have an exact map of how to use seed capital in the best way to ensure smooth transition to the advanced stage of the business.
Seed funding is a risky affair
It is always hard to predict the future of a business when it is in the ideation stage. Same goes with seed funding. Banks and venture capitalists see seed funding as an ‘at risk’ investment option. Mostly, fund providers would want to wait to see how the business idea cultivates and whether it has the potential practically or not. To get seed funding, a lot depends on the founder’s skills to make the investors believe in the business idea, his or her previous track record, product or service’s benefits along with the advantage for the investors in the business.
From the point of view of the founder also, seed funding should be taken after assessing the risk and requirement. Because the fact remains that every time you receive funding, you have to give up a piece of your company in the form of equity. The more funding you receive, more people come onboard as co-owners. More co-owners mean lesser control over your business and therefore, the requirement of funding must be assessed with a clear vision of the future and acceptance of reality before going for it.
How much seed funding to raise?
Many are of the view that you should be able to generate as much money as you would need to reach the stage of profitability, so that you would never require to raise money again. However, this may not happen at the initial stage of the business. So how to come to the ideal magic number? Here are the factors you should consider.
- Know your monthly cash burn estimate with respect to your initial requirements and only then go ahead with a presentation to an investor
- Discuss with the investor. It is very likely that the budget you present to the initial investor may seem less/more to him. After all, it may be your first venture but the investor might have an experience of funding many such ventures. Ask for suggestions for better finance management
- Map the important timelines or milestones you wish to achieve and make an estimate of the same. Not only will it give you a clear financial road map but it will also instill the much-needed confidence in the investor
- Don’t be very stringent or you may end up being under-funded, and neither go to the investor with too much buffer. An investor would not like to have the business ‘overpriced’ too. Keep only as much buffer you would need to get the next funding once you achieve the desired milestone
Seed funding formalities
Unlike matured rounds of funding, the paperwork involved in seed funding is relatively less and straightforward. Even the legal fees required are also quite less as compared to the seed equity. The interest rates too are usually lower and there are mostly no restrictions in the manner of business working as it is still in the nascent stage.
Is getting seed funding easy?
Almost everyone is open for seed funding at this time. The environment is favoring unique business ideas and creative minds. Investment firms are far easier to reach now than ever before. All you need is a fabulous, practical idea with a detailed business plan. If you get the attention, finances won’t be an area to worry about. From big shot entrepreneurs to dedicated angel investor companies, the opportunities are huge. What you need is a breakthrough idea and a formidable willpower.
While seed funding is critical to transform a business idea into a reality, don’t rush in to close the funding deal or don’t get lured by the amount of fund blindly. It is imperative to weigh your payment terms, returns, holding in the company and the vested powers of the investors. One of the most important factors to consider before closing the deal is to ensure that the investor also firmly believes in your idea and your execution plan.