Having a startup idea is great! But, procuring the required funding for startups may be difficult at times. The term, ‘seed funding’, ‘seed investment’ or ‘seed capital’ are becoming common for the audience. Several startups, be it an EdTech startup or any other technology-based startup, are seeking funds to grow their business. Several viable options are available to get investment where founders submit business plans and get complete support to build their startup and turn it into a scalable venture.
Although founders are free to seek funding for startups at any stage, seed funding is the most commonly sought. But before beginning to look for investment, let’s have a look at the concept of seed funding and its types.
What is Seed Funding?
Seed funding for startups is the funding a business receives at the earliest stage of idea formation, plan or prototype. During the initial stages, either the business does not have any customers at all, or possess negligible customers. The investors offer funding for startups ascertaining the potential of the business model.
Technically, seed funding for startups refers to a relatively small amount of money that the Founders use to start a business. It is an effective solution to the growing business needs of any startup. Also, it provides the much needed early monetary support before the business starts earning its own revenue. As the competition becomes tough with the advancing stages of business, entrepreneurs face numerous challenges. The cost of infrastructure, marketing, development and even hiring cost needs to be taken care of. Seed funding for startups can help incur all these expenses while the founders focus on building and upscaling the business.
Types of Seed Funding
There are several types of seed investment options available to entrepreneurs. Thus, founders can procure funding for startups through multiple ways. Here are some of the common types of seed funding in India.
Crowdfunding is an open platform that provides funding for startups. Currently, there are more than 500 active crowdfunding platforms. Such platforms are open to everyone around the world. Anyone with an idea, can approach these crowdfunding platforms to get investment for their companies.
2. Corporate seed funding
Tech giants such as Apple, Google and others, regularly offer seed money. Such corporate businesses are a great source of funding for startups. The reason that these tech giants offer seed investment is that they view startups as a source of profit or talent.
Incubators provide small seed investments along with other services. These services include office space, other infrastructural needs or training. Therefore, not only incubators offer funding for startups but also support them beyond funds with no equity requirements.
The striking contrast between the incubators and accelerators is that the latter helps scale up the startups rather than nurturing them at early stages. Not only do they provide small seed investments but also back startups with professional services, mentorship, customer network and office space.
5. Angel investors
Angel investors are one of the biggest sources of funding for startups. Angel investors are the individuals that offer capital investment in place of ownership equity or convertible debt. They are the ones who support a business at the stage when there is maximum risk.
6. Personal savings
It is the founders’ own wealth or savings that they save to use as funding for startups. The use of personal saving, also called bootstrapping, puts additional financial pressure upon the founders. However, there are no issues of borrowing or repaying money.
7. VC funding
Venture capitalists are the investors offering funding for startups, considering various parameters including idea, founders’ vision, market conditions, growth potential, and more. The venture capitalists take a portion of equity or stake in return for offering funding for startups.
8. Angel funds or Angel networks
Several investors come together to form an angel network or group where each of them invests small amounts in a startup during seed or series A funding stage. Such groups mainly focus on helping startups take their first steps rather than simply gaining profits.
9. Convertible security
Convertible securities are the investments starting off as loans that later convert to equity or shares. The progress entirely depends on the progress of the company. It happens usually when the company reaches a milestone by making good sales or reaching certain revenue targets.
10. Debt funding
Debt funding for startups refers to the money that the founders borrow from banks as loans, or from friends and family. Manyatimes, venture capitalists offer loans instead of equity investments. It is common for ventures with high cashburn sectors and traction.
Importance of Seed Funding for Startups
The sole purpose of seed funding for startups is to provide enough capital for pursuing the business idea and prove if the concept works. Every investor looks for different requirements before offering investment to a seed stage startup. Usually, it is to pursue a product-market fit, which means that the product must be good and taken to a good market to satisfy its needs. Thus, seed funding for startups is essential and has numerous advantages. Some of the advantages of seed investment are as follows:
- Reduction of Founders’ risk when starting a new venture
- Covers insufficiency of funds
- An efficient source of working capital
- Brings in strategic partners, in turn expanding the business relationships
- Helps scale up the business and accelerated startup growth