Seed Funding: Types and Advantages

Equipment must be purchased, offices must be rented, and employees must be hired. More significantly, they must expand. To execute these tasks, companies will almost always need outside cash.

 

Seed money is a term used to describe a company's first round of funding. This quick guide summarises everything startup founders need to know about raising the seed money they'll need to get their business off the ground.

 

 

What is Seed Funding?

 

Seed investment, often known as angel investing, is the backing of a firm at its earliest stage of development, which is generally while it is still in the concept stage, with only a plan, prototype, or in the trial phase, with no or few clients.

 

According to the article, angel investors are people or organizations who invest their own money after evaluating the startup's potential. The investment is intended to provide numerous returns, but it also comes with the danger of being lost if the start-up fails.

 

Since start-ups are frequently young and inappropriate for financing, an angel investor or seed funder invests in stock. A stake in lieu of cash or a right to acquire shares in a future equity raising exercise might be the manner of investment.

 

The angel investor is usually someone who has a deep vertical understanding of the start-company up's and the resources to evaluate the entrepreneur's potential. Venture capital and private equity are two more types of non-public equity investment for businesses. 

 

Working of Seed Funding

 

The seed fundraising method is quite similar to the equity investing procedure, in which investors pay money in return for a stake in a company. Most entrepreneurs, particularly in the IT industry, follow this route to get their company off the ground.

 

Because most investors assess their future return on investment (RoI) before engaging in a deal, the amount of seed money is strongly reliant on the value of a specific firm. These values can take into account a company's growth history, management style, market share, and risk level.

 

How To Raise Seed Funding?

 

To learn how to secure seed money for a firm, there are a few measures that entrepreneurs must do. Founders and entrepreneurs should investigate the investor market and locate an investor who is engaged in the area they operate in for the best investment in terms of size and investor relations.

 

Startups should also have all of the necessary documentation and bank account information on hand. The pitch is one of the most crucial aspects of convincing a potential investor. It should be precise and contain all of the information that an investor would want.

 

All projected statistics and arguments for those forecasts should be included in the pitch. Investors will proceed to discussions if the figures appear spectacular and feasible. Startups can raise seed money in India and abroad in this manner.

 

(Related reading: 6 Levels of Startup Funding)

 

10 Types Of Seed Funding

 

On the path of seed funding, the first step is understanding the different types of investors or potential investors as there are multiple sources where one can aid from:

 

1. Crowdfunding:

With over 500 active crowdsourcing sites, this has become one of the most popular seed fundraising methods. Crowdfunding platforms are often available to the public, and anybody from anywhere in the globe can support a concept, idea, or product.

 

The Oculus Rift, which collected more than $2 million, Pebble smartwatches, which earned more than $10 million, and Indian business Exploride, which raised more than $500K for their heads-up display for automobiles are just a few instances of successful crowdfunding campaigns.

 

2. Corporate seed funds:

This is a fantastic source of first investment since it exposes the company to a large number of people. Apple, Google, and Intel are just a few of the IT behemoths that regularly invest in startups with seed money. 

 

Large organizations usually consider startups as a possible source of income, intellectual property, or talent, and this is the primary motivation for investment in this situation. 

 

GV is the investment arm of Alphabet (Google's parent company), whereas Intel Capital is the chip maker's specialized startup investing arm.

 

3. Incubators

Incubators often provide services like office space and management training in exchange for a minimal initial investment fund. 

 

Most incubation programs do not force the company to give up any shares, but they do provide support in addition to financial assistance.

 

The Indian Angel Network Incubator, IIT-Society Bombay's for Innovation and Entrepreneurship or SINE, Khosla Labs, and state-backed incubators such as T-Hub and KSUM are among the most active incubators in India.

 

4. Accelerators

Accelerators are more concerned with helping entrepreneurs scale up their operations than with assisting and developing early-stage innovation. In addition to tiny seed investments, accelerators provide professional services, networking opportunities, coaching, and workspace to businesses. 

 

Most accelerators, unlike most incubators, need equity because they are privately funded. Y Combinator, Techstars, and 500 Startups are some of the most well-known accelerators.

 

5. Angel investors

Individuals who provide funds in exchange for ownership equity or convertible debt are known as angel investors. Angel investors are named from the fact that they contribute financing at a period when the danger of a business failing is quite high, namely during the early stages. 

 

Sanjay Mehta, with eight deals this year, is the top angel investor in India, followed by VC Karthic, Siddharth Ladsariya, Sharan Aggarwal, and Sachin Tagra, each with seven deals.

 

6. Personal Savings

As initial capital, founders may contribute their personal cash and reserves. This is also known as bootstrapping, and it puts additional financial strain on entrepreneurs without requiring them to repay borrowed funds.

 

7. Debt Funding

Debt often consists of money borrowed from friends and family or taken out as a loan from a bank. In areas where cash burn is high but traction is low, venture capitalists or angel investors may give loans instead of equity investments to enterprises.

 

8. Convertible Securities

These are investments that start off as loans but change into equity or shares depending on the progress of the company, and when it reaches certain milestones such as sales or revenue targets. (Here)

 

9. VC Funding

Venture capitalists are high-profile investors who fund businesses based on a variety of factors including growth potential, market circumstances, founder vision, concept, and execution. 

 

In exchange, they receive a percentage of the startup's stock or a position in the company. If the startup managers achieve those phases, VCs frequently join numerous rounds of investment following the seed stage. 

 

Accel Ventures, Seedfund, Sequoia Surge, Axilor Ventures, and SEAFund are some of the most well-known venture capital firms in India for seed investing.

 

10. Angel Funds or Angel Networks

During the early stage fundraising round, investors may form angel networks or groups in which they individually contribute a small sum to the concept or firm. 

 

AngelList, Indian Angel Network, Lead Angels, and angel networks for each major startup hotspot in India are now the most popular angel networks on the market. 

 

(Suggested reading: A Beginner’s Guide to Tracker Funds)

 

 

Advantages of Seed Funding

 

• Investors Willing to Assume Risk: The biggest advantage of seed funding is that the investors are willing to take the substantial risk of failure that comes with starting a firm.

• Typically, Debt-Free Financing: The majority of the time, the aspiring entrepreneur is unburdened by loans or liabilities. Instead, he or she must offer the investors a portion of the company's stock.

• Prospects for Rapid Growth: Seed funding gives entrepreneurs financial power to seize new possibilities and accelerate their growth.

• Flexible Company Agreements: Unlike venture capital and bank borrowings, the conditions of a seed funding business agreement are variable and flexible.

• Angels Share Their Knowledge and Experience: An angel investor, venture capitalist, incubator, partnership, or accelerator is a person who invests in a firm. He or she also imparts useful facts and knowledge to the aspiring entrepreneur.

• No Monthly Fees: Rather than charging interest or monthly fees, many investors (save in the case of loans and borrowings) choose to own the new enterprise.

• Develops relationships, networks, and a sense of community: Angel investors, crowdsourcing, and incubators are examples of financing options that allow a developing entrepreneur to tap into their business networks and community to establish public relations.

 

(Must read: What is Futures Trading? How to Trade Futures)

 

 

Conclusion

 

It's difficult to foresee a company's future when it's still in the concept stage. The same may be said for seed money. Seed finance is viewed as an 'at at risk' investment option by banks and venture capitalists. 

 

Generally, funders would want to wait and see how the company concept develops and whether it has practical promise. To secure startup capital, a lot depends on the founder's ability to persuade investors to believe in the company concept, his or her track record, the advantages of the product or service, and the value to the investors in the firm.