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meaning of seed funding

For any business, having enough capital is mandatory and a person who is planning to start his own business venture can choose from a number of funding approaches to kick-start the business. One of them is seed funding. However, other funding methods may include shares, stocks, rights, compliances, and others. In this post, you will get to know everything about seed funding. The purpose is to help you understand its value in business-related funding.

What does seed funding mean?

Also known as angel investing, seed funding is a kind of business funding that provides capital in the initial stages of its setup and growth. In most cases, this type of funding comes into action when the business idea is being shaped just a prototype is available, or a trial phase is on run.

The people who get into this type of funding are known are angel investors. These investors may include people or groups who decide to contribute their own money after assessing the potential of the startup. Just like any other type of business funding, this funding also carries the chances of getting higher returns and at the same time the chances of facing huge losses.

Seed funding is very helpful for startups that may find themselves unable to get debt financing due to their infancy level. In most cases, seed funding takes place in the form of a point instead of cash or an obligation to buy shares in a future equity-raising activity.

An angel investor can be a person who possesses higher levels of knowledge regarding startup businesses. In addition, they tend to be backed by several resources that can help them check the potential of an entrepreneur. Some other types of non-public equity financial options for corporates are venture capital and private equity.

How does seed funding work?

The process of seed funding can be equivalent to that of equity funding in which investors give money in response to a stake in a business. For a majority of tech-based startups, seed funding is the most preferred type of business funding.

The amount that is put into a business through seed funding depends on the valuation of a specific startup. The common way to do this valuation is to determine the expected return on investment (RoI) before making any such funding. Some common factors included in this type of assessment are management approach, growth track record, market share, and attached risk level.

Different Types of Seed Funding Available For Startups

There can be different types of seed funding that are primarily categorized on the basis of the investors involved. Let’s look at them.

Crowd funders

Crowd funding is one of the most preferred types of seed funding. There are over 500 crowd funding platforms available to choose from. These platforms provide steadfast financial support to both existing and startup businesses worldwide. For those looking to get funds this way, it is necessary to submit the business idea to all the interested funding parties looking to invest in the same. Ketto, Catapoolt, Wishberry are some of the popular crowd funding platforms in the country.

Corporate Seed funders

Corporate seed funders is another popular source of crowd funding. Startups that are backed by an inventory of innovative products can choose to take the benefit of this opportunity which is funded by giants of the industrial sector like Google, Intel, Microsoft, and others.  These tech honchos are willing to fund a startup if they are convinced that the idea would churn out a huge return on their investments.

Angel Investors

In addition, it is pretty much common for investors to provide funds in exchange for stock in the business by making modest monetary contributions. These financiers are called “angel investors” as they often prevent enterprises from going down. When it comes to controlling the associated risks, these financiers frequently establish a network of other angel investors by spreading the financial investment across numerous individuals.

Venture Capitalists

Investors called venture capitalists (VCs) make financial contributions based on a number of criteria. Because they contribute larger quantities of funding than angel investors, they are far stricter when it comes to qualifying startups. They therefore frequently carefully consider a startup’s growth potential and portfolio before making an investment. Occasionally, venture capitalists (VCs) assume a more hands-on involvement in the management and direction of the business.

How much time it takes to get seed funding?

Be it any kind of startup, one common thing to understand is that it takes time to get funds through any of the funding approaches. In general, the process of seed funding can take a minimum of 3 to 6 months. However, it may go beyond that too in the case of new startups. Those who already availed of seed funding may face a bit of a waiting period if the last deal was quite a success. According to experts, it is very much necessary for startups to do thorough research and prepare all the required documents perfectly to shorten the waiting period and get the funds expediently.

What is the right time to choose seed funding?

Keeping in mind that it could take some time to raise money through seed funding, startups need to have an idea of the perfect to kick off their seed funding campaign. According to experts, a seed funding campaign should take flight when there is already a product that is able to meet the needs of the target audience or market. Though this could include an easy logic, this encompasses the following important procedures that need to be put in place before going with seed funding:

  •  Market research: Before giving wings to a seed funding campaign, it is necessary for startups to determine if that target audience has sufficient interest in their product and would that product be feasible to launch and maintain.
  •  Customer persona: Additionally, startups would need to know who their clients are. Creating personas can assist in persuading financiers that there exists a prospective clientele. If the startup could demonstrate that the target market is using the product more frequently, that would also add value.
  • Product development: Without a completed product or a working prototype, it would be difficult to persuade investors to fund a firm. It’s also possible for startup founders to pitch their ideas to investors alone, although this rarely succeeds unless their product is truly unique. To demonstrate to investors how their product functions and what problems it solves, most businesses require a working prototype as well as a high-quality product demo.

Determining the most perfect time to avail of seed funding is crucial to get the most desired outcomes. The aforementioned things are only the general prerequisites, and there may be several more comprehensive things. At the outset, it can be said that the best time to launch a seed funding campaign is when the startup can think that the offered product would be able to entice customers.

How seed funding and angel investing are different?

There is no major difference between seed funding and angel investing. In general, angel investment is considered an element of seed funding since angel investors don’t get involved in seed funding campaigns. The major difference between these two types of funding comes down to the stage of investment.

The term “seed funding” exactly describes the first stage of finance for a company project. The founders, as well as their friends, family, and relatives, are possible investors in this round. As previously stated, seed cash is also contributed to by angel investors. Having enough money to hire employees and cover the cost of the equipment and office space that is required is the aim of seed funding.

The company can move on to the Series A round of funding, which is meant to level up the user base and products offered. if it has built a user base and consistent revenue. At this point, angel funding still plays a role, but it typically terminates at this level Angel investment, therefore, is largely considered as financing that continues far beyond the infant stage and may extend up to the Series A round. In any case, the business must be funded before it can turn a profit using the combined funds.

The Conclusion

In general, seed funding can be described as a sum of money that is invested in a business when it is in its nascent stage. There could be numerous sources of this fund such as family members, crowdfunders, friends, and sometimes angel investors. The amount to be invested through seed funding is usually determined through a thorough assessment of the startup’s potential, its market value, and numerous other factors. For any business looking to start seed funding, a few things are very important like market research, customer persona, and product development.

FAQs

What is the typical length of a seed funding campaign?

In general, a seed funding campaign should run for a period of 12 to 18 months. However, there is no such restriction as it tends to last till the projected funds are accumulated through the campaign.

What are the major benefits of seed funding?

The major benefits of running a seed funding campaign are numerous available resources, absence of debt, risk forward investors, etc.

What is the Startup India Seed Fund Scheme (SISFS)?

SISFS is a government-led initiative that is meant to give financial support to startups in India. The campaign projects to offer startups financial assistance by providing an amount of up to Rs.10 crores.

What are some of the most popular seed funding platforms in India?

Some of the major seed funding platforms available in India are FundRazr, Catapoolt, GoFundMe, Indiegogo, Ketto, Fuel A Dream, etc.

Is seed funding legal in India?

Yes, this type of business funding is legal and popular among startups looking to raise funds.

By Kirti Rajput

I have been a content writer for the last 3 years and have produced user-oriented finance and legal content, that informs the reader. My writing style involves long-form content, articles, and analysis. The SEO practices are used in each content with thorough research by analysing case studies, stats, and press releases.

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