What is Seed Funding?
An early stage in a business’ life cycle, such as when it is still in the idea stage, has only a prototype or is in the trial phase with few or no clients, is referred to as seed funding or angel investing.
Angel investors are typically people or groups who contribute their own money after evaluating the startup’s potential. The investment includes the risk of being lost if the start-up fails even though it is anticipated to provide profits in multiples.
Since start-ups are frequently in their infancy and unsuited for financing, an angel investor or seed funder provides stock. The investment could take the form of a stake in place of cash or a right to purchase shares in a future equity-raising operation.
The angel investor is frequently someone with extensive vertical knowledge of the start-industry up’s and the resources to evaluate the potential of the entrepreneur. Venture capital and private equity are additional non-public equity financing options for businesses.
Difference between Seed Funding and Angel Investing
Because both terms are frequently used interchangeably, it can be difficult to distinguish between seed funding and angel investing.
However, the very first investors in a startup are angel investors. Individuals or a syndicated group investing in early-stage firms are both examples of angel investors. However, Seed Funding is the round that comes right before Series Funding rounds. Consequently, the seed investment round is the time when the business begins to get the eye of the major players in the venture capital industry.
Why is Seed Funding important?
Start-ups find seed capital to be quite beneficial. The benefits of seed money are listed below.
- It lessens the chance that a new business will fail.
- It compensates for a lack of resources.
- Working capital is provided by it.
- By bringing in strategic partners, it strengthens a company relationship.
- It facilitates scaling up and quickens growth.
Types of Seed Funding
Crowdfunding: Platforms for crowdsourcing have recently gained popularity as a place to find startup money. Anyone can support the idea, concept, or product on these platforms because they are typically open.
Corporate Seed Funding: Due to the large corporate investors, this is a very good source of seed money as start-ups become more well-known. Regular seed money is provided to start-ups by big corporations like Google, Intel, and Apple. For young businesses looking to establish their brand, such investments can be quite beneficial.
Angel Investors: These are the financiers who contribute seed capital to a startup in exchange for equity or convertible debt.
Incubators: These investors specialize on assisting the start-up businesses by offering training and frequently also office space in addition to tiny seed money. Such services are also offered by numerous prestigious academic institutions, including IITs and IIMs. Startups are typically not required to provide incubators any shares.
Accelerators: These investors prioritize scaling-up assistance for emerging businesses over early-stage innovation funding. Additionally, they offer assistance by offering networking opportunities, mentoring, and various forms of training. Accelerators typically take equity, unlike the majority of incubators.
VC funding: High-end investors known as venture capitalists make investments in new ventures after considering a variety of factors, including market conditions, the founder’s vision, growth prospects, etc.
How to raise Seed Funding?
It is essential to have a unique business concept that can be commercialized in order to raise startup money. The investor pitch, in addition to the idea, is equally important. A thorough business plan outlining the target market segment, market potential, current and potential rivals, and the company’s financial projections for the next five years should be available from the company seeking financing.
Startup funding rounds are created so that an investor can acquire a portion of the company. Therefore, the investor gains from both the startup’s short- and long-term financial success as well as its long-term valuations.
A typical chain of rounds is used to finance startups. The various rounds of fundraising are in accordance with the startup’s valuations, operational maturity, and growth possibilities at various phases of its life.
A business receives funding for the first time through pre-seed funding. The promoters, their close family, or their friends typically donate the money. Pre-seed capital aids in the startup of the company. The money is used to pay for the startup expenses associated with starting up the business.
The first formal money made available to a corporation is called seed funding.
Series A Funding: Only a select few businesses go past the seed capital stage due to the low success rate of startups developing into large organizations. Investors need more than simply a business idea from the companies that do make it to the series funding level, though.
A long-term plan is required for investors. Venture capitalists are drawn to any company beyond the seed investment stage that exhibits promise in terms of long-term monetization of its expanding user base. Companies receive Series A funding to expand their product offerings. At the level of Series A fundraising, seasoned participants in the venture capital industry tend to the demands of the startup.
As a result, angel investors who participated in the round of seed fundraising are less prominent now. Venture capital companies make the decisions. In most cases, an anchor investor will show interest in a firm and encourage additional investors to follow suit.
Series B Funding: The businesses that advance to the Series B round have outgrown their development phase. The businesses now have to satisfy the demand created after making their items visible. The money acquired in this round will be utilized to broaden the company’s market reach and hire more employees.
Series C Funding: Companies that are in this level of funding already have a marketable product, a loyal customer base, and a track record of expansion. The startup is helped by the fundraising round to grow as quickly as feasible. Inorganic growth strategies, such buying a rival company, can be used to achieve high levels of growth while obviating competition. At this point, the companies have already demonstrated their promise and present a far lesser risk. As a result, more organizations, including private equity, investment banks, and hedge funds, get involved at this point. Additionally, after this stage, the majority of businesses aspire for an IPO (IPO). The companies may decide to pursue a few more Series Funding rounds if they are unable to meet the objectives outlined for the Series C Round. Since they are solely based on facts rather than assumptions, the valuations made at this point are not a wild guess.