Seed Funding for Startups - How to raise funds explained

Let’s say you have a brilliant idea, developed a product but got lost along the way because of financial crisis. Well, you are not alone. Most new startups and entrepreneurs seek funding to develop their product and gain traction within the market. And seed funding is the type of funding available for such startups who have already demonstrated a market need for their product. 

In this blog, you will learn how to get seed funding, types of seed funding available for startups and more. 

Table of Contents

01. What is seed funding for startups? 

02. What is a seed round? 

03. What is the difference between seed funding and pre-seed funding for startups?

04. How to raise seed funding?

05. Key Takeaways

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01. What is seed funding for startups? 

Seed funding is the first round of the official funding process for startups. This is when investors provide funds to businesses in return for adjustable debt or equity in the company. This also mean that entrepreneurs must be willing to give up a portion of their company for the sake of raising funds. And raising funds for startups could  be from family, friends, angel investors, incubators, venture capital firms  and so on.

02. What is a seed round? 

Since startups cannot depend on a single round of seed funding, there’s  funding rounds as Series A, B and C funding rounds and more. For example, a plant needs water several times in order to grow as a tree. Likewise, a startup also requires several seed rounds to fund the development till it reaches its point to become a unicorn startup. 

03. What is the difference between seed funding and pre-seed funding for startups?

Although both types of investment work similarly, businesses seeking pre-seed funding are at a growing stage yet to demonstrate a market fit product for their idea. On the contrary, seed funding is for businesses who have developed a product but seeking funds for development. And a startup can begin seeking their capital during pre-seed round or at series A seed funding round depending on their product and the amount of investment. 

04. How to raise seed funding?

Step 01: Find the right timing

Do you actually need funding? If so, is the timing perfect? 

This can be decided based on two criterias : i) Are you prepared to give up shares of your company? ii) Can you persuade an investor that your startup consists of everything they're looking for? In terms of persuading your investor, startups must showcase that the product has excellent traction, (consumer acceptance), meets a large market need and driven by a capable team.  If you can meet these requirements, then the time is perfect to meet investors.

Related: 5 common reasons why most startups fail (2022)

Step 02: Decide the type of funding ideal for your startup 

01. Venture Capitalists (VCs)

• Who: Corporations that exist for the purpose of providing funding to businesses. They are the most widely accepted type of funding, notably as you advance through Series A and beyond. They are also known for making large bets on new startups according to Investopedia. 

• Pros: Countless (but not all) venture capitalists are available for seed funding

• Cons: Selective of startups they invest in, multiple stakeholder meetings 

02. Angel Investors

• Who: Angel investors are the second most common type of investor for seed funding. Angels invest their own money in early-stage startups (as opposed to VCs who devote others capital)

• Pros: Faster process of acquiring funds, ready to take high risks, brings in their invaluable experience

• Cons: Less control of the business, demands a larger equity stake in return, wrong angels may become problematic

03. Crowdfunding

• Who: A community of investors who pool funds to invest in creative projects. Ex: Kickstarter 

• Pros: No giving up of equity in business or intellectual property, easily connect with your target audience and conduct product pre-sales, receive feedback on the product development, persuade a large number of funders to invest before product launch, 

• Cons: Requires an attractive project page, takes time and  capital to develop a project page, marketing and PR, limited funds

04. Incubators

• Who:  Non-profit organizations governed by private and public entities. 

• Pros: Free workspace, access to mentorship, services, expertise, capital and influence, interaction with entrepreneurs 

• Cons: Competitive application process, open space not ideal for a large team, specific market oriented

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05. Accelerators

• Who: Investors who support startups with traction to scale. Ex: 500 startups, Y combinator, Techstars Boulder, Dreamit 

• Pros: Access to suitable investors, networking, mentorship, and workspace, community, free marketing and PR

• Cons: Selective programs, various regulations to follow

06. Bootstrap

• What : Bootstrapping involves investing your own money or simply relying on business profits to invest the money back into the business growth.

• Pros: Control of your business and equity

• Cons: Risk of running out of funds, lack of capital flow

07. Friends and Family

• Pros: Flexibility in controlling the business

• Cons: Relationship issues may influence the funding as well

Step 03: Decide how much seed capital you should seek

A single round of seed funding is insufficient. This means that especially tech startups would frequently require a follow-on round to continue till they reach financial profits. To determine how much to raise, consider, the growth rate brought by the funding amount, the startup burn rate per month, time period it takes to survive and trustworthiness of the investor. 

Step 04: Learn how to approach investors for seed funding

I. Build your pitch deck 

When evaluating investment opportunities, seed investors expect to see pitch decks. A pitch deck is supposed to attract the investors to invest in your product. Keep it simple and include the story of your company, the founders, present position and future plans. And for the investors to invest, include the services, products and how you're solving issues. Be persuasive and convince them with a story. An interesting story is more likely to be remembered than pointless facts and figures. 

Related: You better have these 7 crucial slides in your startup pitch deck

II. List out the Investors 

When it comes to investors, you must figure out the ideal investor who is more likely to consider investing in your startup. Seeking investors through business networks, incubators and accelerators are some of the common few methods of seed funding.  But how do you know who has a better chance of succeeding?

In order to find the ideal investor, determine whether you prefer someone who would help as a partner with capital or as an adviser. The potential investor should have the capability to fund, success rate of startups, expertise, connections for your startup to scale and be a good fit to the company. You can also find investors on sites such as crunchbase and visible connect. 

III. Meet with the potential investors

Meeting with investors can be nerve-wrecking but with time, you will develop your competence naturally in dealing with them. There’s also a good learning and experience here because you get to meet and communicate with a number of different investors before finally signing a deal. When meeting with potential seed investors ensure you understand the investor and their interested fields, how they analyse and make decisions. 

Related: 5-step guide to pitching your startup to investors.

Step 05: Finalize the agreement.

Negotiating may seem risky when dealing with VC or angel investors who are far more experienced. First offer will be tempting but it’s worth it to bargain on variables like equity compensation if you have the chance. But more importantly, having funds in your account as soon as possible should be the priority. So, once you and your partner have agreed, sign the documents and settle up.

05. Key Takeaways

With the basic understanding of seed funding, you now know how to raise funds for your business. Your startup journey can be accelerated with the help of the ideal investor and figuring out the right moment. Finding investors for startups may take time and along the way, you will experience how to build pitch decks and how to target the investors suitable for you. Look ahead of the journey and never give up! 

Recommended Next: 

Most Common Startup Pitch Deck Errors and How to Avoid + Tips

Startup Project Management Guide in 2022

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