Coming up with a great idea for your startup is one thing, but it’s often what comes next that can make all the difference. Without a sustainable source of funding to hire employees, rent office space, and pay other expenses, most startups will be forced to shut their doors in short order.
That’s why early-stage founders are constantly working to raise capital for their business, and it all starts with a fundraising seed round. So what is seed funding, exactly, and how can startup founders acquire seed round fundraising?
What is seed funding?
Seed funding is the very first official round of startup fundraising that most companies go through. As the name suggests, investors provide “seed money” that will hopefully cause the startup to grow into a large, successful business.
In some cases, very early-stage startups also raise “pre-seed funding,” an unofficial funding round to help the company get off the ground. This money is usually sourced from the founder’s personal network, such as family, friends, and colleagues. Pre-seed funds may also come from startup accelerators or from winning startup competitions.
A seed round is different from pre-seed funding because of the types of investors who participate. Seed funding is usually when larger players such as angel investors begin to get involved in the fundraising process. Additionally, businesses that pursue seed money for startups tend to have found a clear product-market fit and are beginning to build a solid team.
During a startup seed funding round, companies generally raise money by trading equity in the business (on the order of 20 to 25 percent) for funds. At the end of a seed round, the startup should have enough money to survive until its next fundraising milestone, which is usually within 12 to 18 months. According to Wing Venture Capital, the typical seed investment amount had a median value of $4.0 million in 2020.
If the startup has had success raising seed round funding, the next step is to seek Series A funding, which is when many venture capitalists start to take an interest in the business. At this point, the company should have a solid user base and exhibit consistent growth in revenue.
Angel vs. seed investment
What’s the difference between seed fundraising and angel investment? The question of angel vs. seed investment is a common one, since many angel investors begin their relationship with a startup during the seed fundraising round. However, while there’s a great deal of overlap between angel and seed investment, they aren’t quite the same thing.
Angel investors are typically high-net-worth individuals who have a great deal of experience and connections in the startup community. As such, they are one of the primary sources of seed funding, backing companies financially in exchange for equity.
However, angel investors are not the only potential source of seed capital funds. For example, a few venture capital firms may also take an interest at this point. Still, many startup founders prefer angel investors because these individuals can act in a much-welcome advisor or mentor role during the company’s early stages. In fact, some startups have a fundraising round called an “angel round” in which they only seek funds from angel investors, entirely separate from the seed round.
Understanding how to get seed funding
Knowing how to get seed funding is an essential skill for startup founders. Follow the tips and best practices below for the best chance at success during your seed fundraising round:
- Identify your funding target: As mentioned above, seed rounds usually seek to obtain enough funds for the company to reach its next milestone in 12 to 18 months. When calculating this figure, consider the cost of payroll, rent, utilities, taxes, inventory, loans, and other expenses that you’ll need to pay for within this timeframe.
- Prepare your funding pitch: Any startup looking for seed funding must be able to clearly articulate the business proposition for investment. Be ready to discuss topics such as the company’s business model, your market and target audience, the problem you help solve, your financial projections, your current expenses, your team members, and your long-term plans.
- Target the right people: Seed fundraising rounds usually involve angel investors, VC firms, or any entity with a keen eye and a healthy appetite for risk. Make a list of the investors you’d like to approach and score them based on their potential importance. The factors you should consider include the investor’s preferred industry, location, portfolio, deal size, and more.
- Start meeting up: Once you’ve reached out to the seed investors on your list, you should be angling to set up meetings. Be sure to tailor your pitch to each investor, with an understanding of what they’re interested in and looking for. If possible, mix up the order in which you hold the meetings, rather than sitting down with all of your top picks first. This will allow you to fine-tune your approach and learn from any initial mistakes.
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