What is Seed Funding and How does it work?
Count yourself as a special one in case you have an innovative business idea. Your idea might create a fortune for you. But is just having a business idea enough? How would you turn that idea into a successful business venture? When you try to develop a profitable business out of your innovative and creative ideas, that is called Startups. In case you are not already a millionaire, you need investors to put money into your thoughts to turn them into businesses. Such investments or funding that would help to turn your business ideas into profitable business are called Seed Fundings. But nobody is going to invest a chunk of money into a vision for nothing. Such investors seek equity in the company as well.
Seed funding in detail
Similar to everyday business ventures, startups also go through many stages to become profitable and develop into thriving companies. And during these stages of development, it seeks investments in money or capital infusion several times. And these timely investments are essential for the startups as they can quickly take the business to different heights.
Now, these capital infusions at different stages of startups have other names, referred to as rounds. Such as angel round, seed round, private equity round, debt round, and some more. But the details of these are out of context here.
However, the round that is essential in this context is seed round or seed funding. And as the name speaks for itself, the seed money is necessary at the early stages of a startup to germinate your business idea into a profitable business.
Although, this seed money or seed capital is not a charity. The investors who are looking to put money on your startup also demand equity stakes in your company. And they are not just looking for equity stakes but partial ownership of the company as well. The primary purpose of the investors to seek equity shares in a startup is to sell these shares later when the business gains recognition and becomes profitable. Thus, this way, the investors make profits.
Why is seed funding essential?
Many times, many great startups suffer due to a lack of money. And money is essential at the early stages to give the startup a push to run on its own. But the startups don’t get the investments that quickly. They even suffer to get debt-based funding due to meager cash flow and limited operating history. Therefore, seed funding offers easy and hassle-free financing for such startups.
What are the sources of seed funding?
There are several sources of seed funding. The angel investors, banks, venture capital firms, friends and family, and every person willing to invest in your business in the hope of getting a profitable return is a source of seed funding. So if your mother or father has promised you to invest $20,000 in your startup, they are your seed funding investors.
But sometimes, the startup founders also invest their own money into startups as it allows them to retain complete control of their company.
The other type of investor is venture investor. But they are not keen to invest as seed fundings, though they are helpful in the later funding stages. As stated earlier, the concept of seed funding has been developed to give a startup a push start to develop into a business. And funding an already running business to expand is not seed funding.
Therefore, funding an already running business is part of Series A and Series B rounds of investment, and venture investors dominate it. At the same time, seed funding happens at the very early stages of business and has a broader range of investors.
Little about series A funding
Series A funding is then applicable when the company is already established. At such stages, the “Series A” funding can increase the product offering and customers of the company. With the help of series funding, the companies can enhance their market range. But while opting for “Series A” funding, the companies should also have long-term business developing business models that will give them long-term profits. And because many startups have great ideas initially but fail to sustain their growth, series A funding can help them for long-term endurance.
But keep in mind that the series A investors are not typically looking for excellent ideas. However, they are looking for companies that have the potential to grow for a long time.
The standard series A investors are usually part of some venture capital firms. Few venture capital firms could come as a complete pack. This means they might fully invest in a business idea. And it is great because this can attract other potential investors as well. You could find some angel investors investing for Series A funding, but their chances are low as seed funding is more tempting.
Now many companies also try to use their equity crowdfunding for generating capital in series A funding round. This is because such companies fail to pull the interest of series A investors. More than half of the seed-funded companies fail to generate Series A funds.
Little about series B funding
The series B round funding comes in handy when the business or company has passed its developing stage. The primary task of this round is to extend the market reach of the company.
The companies that have successfully generated seed funding and Series A funding have already proven their potential and zeal to grow. This means they have overcome the thresholds of developing stages and are now ready to expand their business and customers.
The companies entering into the Series B round of business development have a lot of responsibilities. They have to hire talented and skilled staff, advertise, grow sales, tech, support, and much more things to do. And to all this requires more significant capital investments. Thus the capital raised in the Series B round is usually estimated at around $33 million. Also, companies that enter into a series B round of investment are well established, and their standard valuation stands between $30 million to $60 million.
Series A and Series B do not have many differences, especially when talking about their processes and key players. Series B also has almost similar characters that Series A has. This also includes the key anchor investor, which helps in attracting other investors as well. But the Series B round also adds up more different venture capital firms, and such firms help in the further stages of investment and growth of the company.
Startup Evaluation for Seed Funding
The most important thing to gain seed funding for your startup is startup evaluation. Because no investor will invest in your idea until you show them the potential of your vision, the startup evaluation will help the investors predict the return on their investments. And also, you must know the distinction between different rounds of funding. It would help you understand the different kinds of investment and investors so that you could act accordingly to gain fundings. In case you are facing any kind of problem in the evaluation for seed funding, it would be best to contact a professional.