When you think about a startup, the words that come to mind are words like “potential,” “growth,” “opportunity,” and “ambition.” Startup founders have latched on to an idea that can change the world… but first they need to get their business accelerating, and to achieve their ambitions, they need to do it quickly.
A successful round of seed funding can help with that. By being able to invest into the business from the earliest stages, a founder can set the business trajectory and prepare its foundations for years of dynamic growth ahead.
What is Seed Funding?
In many cases, seed funding is the first official round of financing that a startup receives from investors to get their business off the ground.
For the founder, it’s validating. It means that they’ve done the right thing through the pre-seed stage of the business, and they’ve attracted the attention of investors. Those investors are willing to take a big risk on a business that hasn’t proven itself in the market yet, in exchange for equity.
In other words, the investors have bought into the vision and want a slice of the pie.
For many founders, this is exactly the confidence (and cash!) that they need to really get going with their business. They’ll then use the investment to make hires, develop and market the product, and start to accelerate growth.
Seed Capital Example
A great example of the impact that seed funding can have on an organization is the innovative coworking space company, WeWork.
In 2011, WeWork was able to raise $6.9 million in seed funding. By 2014 the company was considered “the fastest-growing lessee of new office space in New York, and was on track to be “the fastest-growing lessee of new space in America.” Later funding rounds included J.P Morgan, Goldman Sachs, the Harvard Corporation and Benchmark.
Ultimately the company peaked at a valuation of $47 billion, before a failed attempt at an IPO and other factors caused its rapid decline at the time. Despite that, it remains an ideal example of the impact that a relatively small seed funding round can have in setting a startup up for exponential growth.
Why is seed funding important for startups?
Seed funding is generally used to fund a startup’s quest in proving some level of product-market fit. There are several steps involved in this hunt, from marketing to market research, hires to product development and early adopter on-boarding. Seed capital enables founders to make their best attempt at this and entering the market.
Seed funding is also debt-free. A founder could, technically, raise the money themselves by taking out a bank loan or additional debt on their mortgage. The downside to going down this path is that it immediately sticks an obligation for repayments on to the startup. At a time where the goal is rapid growth and revenue is hard to come by, the last thing the business needs is to be worried about cash flow.
Beyond the influx of cash at a critical moment for the startup, seed funding has other intangible advantages too. The investors that take a stake in the company then become committed to its success, and will provide resources, mentoring and networking opportunities that can help the founder start scaling the business.
Pre-Seed Vs. Seed: What are the differences?
Pre-seed and seed funding can look similar to one another on the surface. The startup is still in its very early stages in both instances, and is yet to be proven as a viable business.
However, pre-seed funding, as the name suggests,comes at an even earlier point in the journey than the seed funding round. At this stage, startups are often still in the idea stage or building their first prototype, with the focus on finding problem-solution fit. Seed-stage startups, on the other hand, are focused on developing their product, demonstrating real traction, and achieving some level of product-market fit.
When to raise seed funding?
It can be difficult to know when you’re ready to pull the trigger and start seed capital raising. However, there are four events or milestones that you’ll hit through the pre-seed stage that will tell you that you’re ready to talk to investors. These are:
1) A viable idea and an investable team
This is important for demonstrating to investors that you’ve got the “infrastructure” in place to manage the startup through its next stage of growth.
2) An excellent product
You’re still going to be building out the MVP at this stage. However, being able to prove that your concept works and will address a market need will go a long way to maximizing what you can raise.
3) Proof of traction
If your early adopters love what you’re doing and you’ve seen some positive hype growing in the market, then investors will pay attention in kind.
4) A compelling story
More than anything else, at the seed capital stage, investors want to be inspired by something that promises to make a difference. Having a compelling pitch deck ready will make catching the attention of investors much easier.
Types of seed funding
There are several different ways that founders can raise their seed funding, and types of investors that they can approach for this kind of investment. Some of the most common include:
Startup programs are incredibly popular for the value-add they provide to a founder. There are several different types—accelerators, incubators, and startup residencies— that entrepreneurs can join and will provide mentorship and training programmes, workspaces, and networking opportunities.
You have the opportunity to secure a relatively small amount of capital through these programs, but they can furnish you with significant expertise, support and help you structure your business best right from the outset.
Find out more about Antler’s startup residencies here.
Angel investors are individuals that are willing to risk their own money to make investments in companies that inspire them. Angel investors will often prefer convertible debt or capital to equity.
This can come from banks, but some investors will issue loans rather than asking for equity, too. Debt funding is generally seen as an inferior way to raise capital, as it then burdens the startup with debts, at a time when cash flow and revenue will be strained.
An increasingly popular option for founders is to raise capital via crowdfunding. With crowdfunding, a large number of people invest a small amount of money in an idea they find interesting.
In many cases, people investing via crowdfunding are not traditional investors, but are rather end customers. This makes crowdfunding easier for ideas that already have an audience and founders that have a high profile with the target end-users.
While VCs are traditionally more associated with series A funding and beyond, they are increasingly viewing the seed stage as a major opportunity, and startup entrepreneurs are benefiting from their attention in kind.
VCs have a robust set of requirements for investment, ensuring that your business is one with the strongest potential, and by earning their investment at the seed stage, you’ll have a smoother pathway and support network into later investment rounds.
How much seed funding should you raise?
Conventional wisdom says that between $2 and $5 million is a standard seed funding round today, but what your startup can (and should) seed can vary wildly. Everything from your sector, to the potential audience size, to the state of the MVP, and your own history as a founder can impact what investors are willing to risk on your startup.
You also need to consider carefully how much you want to raise. While it’s easy to say “we want to raise as much as possible,” it is likely that investors will expect more equity in return for higher funding amounts. That can be a big help at the seed funding stage, but you’re going to need to have equity available for subsequent capital raisings.
It is generally expected that you’ll need to provide between 10-20 per cent equity during the seed round. You should carefully weigh the benefits should the investor be asking for more than this, even with the promise of more money.
Seed Funding: A critical milestone
The seed funding stage of a startup is an exciting one. It’s the point where all the hard work you put in during the pre-seed stage starts to take shape, and movement happens quickly.
It’s also a sign of validation. It’s not unusual for founders to have moments where they doubt themselves or their vision. Afterall, launching a startup is a grueling process with plenty of setbacks. Attracting seed investors is cast-iron proof that for all the setbacks, you are on a journey with potential.
And although that journey ahead may be challenging, the rewards are immeasurable. So keep pushing forward, stay focused and enjoy the ride.