A Guide to Seed Fundraising

As a founder, you need the right set of resources and Seed Fundraising is what you need to start with. Below are the main aspects which are required for raising funds.

What is Seed Fundraising? 

Seed fundraising refers to raising Seed Fund which is required for financing the initial stages of operations of a start-up. This form of funding is important for a start-up to carry out initial transactions.

Sources of Seed Funding

There are different sources where a promoter can secure seed funding for a business. The sources of securing such funding are mentioned below:

• Family and Friends- This is the first source of capital which can be utilized by an early start-up. Usually promoters and entrepreneurs would prefer this source of funding during the pre-seed phase or the seed phase. One of the main disadvantage of utilizing this form of funding is the amount of capital contributed would not be sufficient for scaling operations. This source of funding is used by different entrepreneurs at the pre-seed phase.
• Angel Investors- Angel investors are organizations or companies that specialize in funding different start-ups based on the initial amount of investment. The funds contributed by an angel investor would allow the start-up to sustain in the market for more than 12 months. Angel investors would usually want to take part in the managing the affairs of the company.
• Government and Public Institutions- Government and Public Institutions provide funding for different forms of start-ups. For example in the Agriculture sector in India, the government has come up with the scheme of Rashtriya Krishi Vikas Yojana (RKVY) which provides funding for Agri-tech Start Ups. Similarly there are public institutions that provide funding.
• Venture Capitalists- These are big companies that control the funding of start-ups. Getting investment from a venture capitalist can boost the goodwill of the brand and increase the reputation of the company. Unlike angel investors, they do not like to get involved in the business decisions and bring a formal process to the table.  The biggest drawback of venture capitalists is that raising funds can be a cumbersome task as it is time consuming.

Why do you need Seed Fundraising? 

A business plan or a business initiative would not be viable without successful implementation. Hence an entrepreneur would go for seed fundraising. It is easiest way to secure funding for an early stage start-up.

Start-ups need some form of initial impetus to launch their product into the market. When a product is launched in the market, it requires consumers to develop sales and revenue. Hence seed fundraising is the preferred option for a start-up to raise funds. Other sources of raising funds would be complicated. 

An entrepreneur would find it hard to raise funds through his own capital or a loan secured from a bank. However, there are few individuals that rely on their own funding.

Google’s initial seed fund was close to $1 million and Tesla had raised close to $7.5 million as its initial investment. Seed funding helps to shape your idea into a robust business force. It allows you to pool in resources to market the idea, do advance research on it, and launch products. 

The fund shall also allow you to protect your business against difficulties and give you a competitive advantage over others. You need not have second thoughts regarding hiring the right staff, spending on marketing campaigns and using experts for conducting sales pitches. 

However, just thinking of an idea and reaching out for funds is not the ideal thing to do. 

You will need much more than this.  Let’s see when you are ready to raise seed funds. 

When should you go for Seed Fundraising? 

The main concepts behind successive seed funding are: having an idea, a vision and a team.

These three are the basic factors that attract investors. It gets them to fund your idea and develop it into a successive product, if the above criteria is matched. 

You should only approach an investor if you have a well-researched idea, a motivated team of co-founders, and a vision to take it forward and scale. The opportunity presented to the investor should be real and large, and most importantly backed by proper analysis of the current market propositions, customer profiles, and competitors. 

When you and your co-founders have a compelling story to present, only then should you approach an investor. Lacking this would result in waste of time and effort, which could have been spent otherwise. 

Some founders might have a backup story or reputation that can drive the investor but most will need an idea, a product and some amount of traction to be successful.

Apart from these three, market analysis would also play an important role in fundraising. Understanding the current sentiments of both customers and investors is crucial and you should go for it only when the time is right. 

The bottom-line of seed fundraising is to see whether you can sell your idea before you can sell the product based on that. 

If you can do it, then go for it.  

But, how do you do it?

How to Raise a Seed Funding? 

You may raise a seed fund either at the beginning of your operations or after seeing customer traction, but the process remains nonetheless the same. 

You need to understand the process and whom to approach for the fuel to kick start your operations. The process can vary as startups can choose to go for a single source or multiple sources. 

Ultimately all that matters is whether the seed fund is sufficient for your organization’s needs that will help your product or service to gain the necessary traction.

Below are some of the sources that can handsomely answer the asking question- how to raise seed funding? 

• Angel Funds:

Group of professional investors can team up to form an angel network or a fund that invests in the early financing stages of the company. The investors are also known as Angel Investors. 

Angel funding is a form of equity financing wherein you have to exchange equity positions with the investor, in return of the fund. Angel investors may participate in business operations as well. 

• Micro Venture Capitalists:

Generally, venture capitalists or VCs are funding organizations who invest in successful startups in their second or third rounds. However micro VCs are catching up lately who participate in the funding stages when the company is in the seed stage itself. 

Just as angel funds, venture capital funds are also an equity-based investment instrument. These investments are backed by a high-risk high-return proposition. 

• Corporate Seed Funds:

Big corporates are looking to diversify, hence indulge in seed fundraising rounds of early-stage startups which they think have the potential to scale profitably. They look out for innovative and unique ideas. 

Such kind of funding can give huge traction to startups. It can also lead to acquisitions in the future. Corporates such as Google, Apple, Tata, and others have corporate seed funding arms that analyze and invest in startups to back their growth. 

• Incubators: 

Many top colleges have startup incubators that provide minimal but sufficient seed funds that help in kick starting the operations. Apart from funds, the incubators also help in product development, training the founders, and other requirements.

Funds from incubators might not require you to divulge equity and they shall assist you to help your product to be fit for the market. They shall also help in scaling up the product. Incubators mostly consist of founders, alumni, top executives, and researchers.

Now, that you have known from whom to raise your funds, let’s know how much should you raise?

How much should you raise? 

Preferably, you would like to raise funds that would help you sustain a period of 12 to 18 months and reach profitability. This will help you to raise funds in the subsequent rounds. 

In an ideal world, no startup has been able to move on without subsequent rounds of funding. You should aim at raising funds based on a “fundable milestone”, i.e. estimations that would help you sustain until the next rounds of funding. 

Conclusion: 

Seed fundraising is a vital cog in the wheel in the startup journey. As a founder, you have to go for it to gain the impetus that shall propel you towards success. 

You must think of an idea, research the market and then approach the right source by gauging your requirements and needs. You should always aim at raising fund volume that shall help in operations until your next “fundable milestone”.