Here’s a short definition of seed funding: Seed money is part of the early-stage investments startup companies receive from investors - in exchange for an equity stake in the company. Seed funding is the first official funding round that follows right after pre-seed investments. The purpose, and primary goals, of seed funding is to get the business up and running. It is required to cover the initial stages of product development, extensive market research, and other initial stage operations.
In other words, seed funding is part of the initial investments made in new companies. The funds are then used to continue the growth of the business. As part of the seed funding for startups process, there must be a type of return value to the investors. This could either be an equity or stake percentage, in some cases it could be a share of later-stage profits.
Depending on the nature of the startup, the seed capital can either be a small amount or quite large - depending on industry and other relevant business factors. Seed venture capital firms are usually in a position to make larger follow-on investments to maintain or expand their equity stake in the company.
The term 'seed funding' comes from the analogy of growing a tree, the seed being the first element needed to further develop a business. With this in mind, seed funding refers to the initial sums of capital a startup raises. The seed financing stands for the initial equity funding stage.
The multiple funding rounds startups go through is set with the purpose of gradually building the company, from a proposed model, into a fully operational business. Without startup funding a vast majority of startups will not make it to the finish line, as most high growth and scalable companies go through a fase where they need to burn capital to boost their growth before becoming profitable. The
seed investment round is often raised as the cash allows startups to live and grow, a war chest is also almost always a competitive advantage in all ways that matter - hiring key staff, public relations, marketing, and sales. This means that capital is infused in the startup in return for business stakes. Most startups that operate in the tech industry and its respective sectors usually follow this route to grow their business.
Since the average startup, assessed by seed stage investors, does not have much sales data or history to go on, the estimated growth trajectory and existing track record, management, market share and risks will be taken into consideration.
The deal made between investors and the startup is mutually beneficial. The startup receives seed capital to further develop their operations and the investor receives an ownership percentage of the business. In many cases, this is ideal for startups wishing to grow.
By "giving away" a percentage of ownership, new management insights are gained from the investors who take part in the business decision making processes. This can also possibly bring about competitive advantages for the new startup, against more advanced competitors.
Early-stage investing funds commonly refer to the first three stages of a company’s development, namely, pre-seed, seed and series A funding. Each funding round has a unique purpose and different milestones to achieve, in order to help develop and grow the business. Here’s an overview of the common terms associated with early-stage investment rounds and their differences:
Early Stage Funding is the term used to describe the earliest rounds of the funding process a new company or startup has to go through, in order to reach the stage of being a fully established and operational company. Early stage startups commonly have a tested prototype and are developing the final business model.
Since there are more risks associated with new companies and startups, as they often don't have a solid position in the market yet, investors are more critical in their evaluation before investing. However, later stage investors have begun to show greater interest in seed stage investment /early stage investing, as they aim to secure a seat at the table early on. This makes the idea of obtaining , for example, seed venture capital more doable for many startups - especially for those in the tech industry.
This is the very beginning of the funding process for new companies or startups. During the pre-seed funding stage, investors don’t have a solid business plan to base their investments on yet - the pre-seed funds are usually collected to start preparing a workable business model that demonstrates the future viability of the business.
Investors are willing to write checks when the idea they hear is compelling, when they are persuaded that the team of founders can realize its vision, and that the opportunity described is real and sufficiently large. As investors are buying a stake percentage in the company, they want to be certain about the quality of their investment.
The seed round is initiated to help a small company start their business operations. Generally speaking, seed stage venture capital is usually acquired when the business model is developed further than just an idea of a product or service. The startup is able to demonstrate potential of developing into a sustainable business that will generate a return on investment (ROI), with additional profits for both the business and investors.
At this stage, the startup should have completed its business model, there is some form of significant revenue to demonstrate product-market fit. Typically, this is the company's first significant round of venture capital investments. The goal of this round is to provide new companies with additional capital to cover operational expenses; such as, pay employees, launch products and develop marketing plans.
After the series A round, the funding process continues with series B, series C, series D and so forth. However, after series A, the funding process transitions to later-stage financing. This marks the completion of early-stage investing.
When company founders are ready to tell their story, that’s when raising seed funding can begin. Investors don’t only want to see product features or hear about service offerings, they need persuading - they want to know about product market fit and want proof that the product has room for growth in the market!
Seed stage funding is intended to provide the capital foundation from which a new company or startup can pursue their idea to demonstrate that a product/serve will work in the identified market. Depending on the nature of the company, as well as the requirements from investors, certain milestones will have to be met in order to display “product-market fit".
That being said, the right timing to approach seed stage investors can be difficult to determine. The first indication that it's the right moment to approach seed investors is when the company has enough evidence to show they have a strong product, market, or team. Ideally, a combination of these elements are solid enough to continue developing a company that is worthy of being venture backed. This means that the company will be able to scale and grow to the valuations where investors can generate a solid ROI.
Typically, it is a safe stage to apply for seed funding when startup founders have clearly identified their market opportunity and who the customer is. Additionally, the startup can deliver a unique product/service that speaks to the needs of the market space. As investors are interested in seeing data that proves they will receive a return on investment, seed funding applicants should have research to support the following:
As the company is still in their development phase, research-backed sales estimates are acceptable, as long as the presented statistics are an accurate representation of "product-market fit".
Founders should raise money when they are certain of their story, have figured out their market opportunities and know who the customer is. Also, when founders want to raise funds, they need to impress - to convince investors takes data AND persuasion. When founders have enough data and proof to show that their business has growth potential, they can start building their story to pitch to investors and start collecting funds.
Firstly, in order to understand how to raise seed funding, you need to know who the most fitting investors are for your startup. More importantly, you need to prove how your company is a lucrative investment opportunity. Here’s six steps you can take to ensure you succeed in the process of getting a solid seed capital investment:
The first step is to determine the right time to start collecting seed money. When considering this step, founders should take into account if they are willing to give up stake in the company. Next, if they are in a comfortable position to meet investor’s criteria. The company should also be able to demonstrate market potential, product/service traction, and scaling potential.
Next, you need to determine what type of seed funding will best fit your business model. You’ll first need to have a clear understanding of how your company will operate and what it will take to reach the next funding milestone. For example, you need to calculate the costs of new customer acquisition, retention, salaries, marketing, etc.
Investor types:
Angel investors are individuals who invest their own money in early stage companies, as an alternative investment type. This is different from seed VC, as VC firms invest on behalf of others. However, angel investors usually expect a larger equity percentage in return for their investment.
These enterprises are built on the principles of assisting startups in the process of establishing and growing a company. Usually, these types of investors won’t ask for equity in exchange for service offerings. This makes it affordable for small companies to approach these investor types.
This involves creating a crowdfunding campaign. Campaigning is built on product pre-sales and then convincing a very large number of people (donors) to invest in the company - before it is listed on the market.
The total funding amount is highly dependent on the nature of the business and expectations from investors. As a general rule, enough seed capital should be raised to reach the needed metrics to raise series A, which tends to be highly contextual. The total sum of seed money should enable you to reach your next funding milestone. Realistically, the amount should be comfortably raised within 12 to 18 months.
Once you have identified your ideal investor type and have established how much capital you need, it’s time to start reaching out. Keep in mind that investors need to see evidence of future success, they need to feel confident in making an investment. Though investment decisions will be made subjectively, tangible plans and forecasts are welcomed.
The next step is to prepare your pitch to investors. Knowing your audience (the investor, not the customer) will help to tailor the proposal according to whom it's going to be presented to. Remember to keep the pitch short and focused on the most important details (problem to solve, customers, solution, market size, traction, business model, long-term forecast).
As previously mentioned, the nature of the startup will determine how much funds to raise. Clearly planned milestones are good indicators to keep in mind when plotting out each funding stage's goal capital amount. Reaching the metrics needed to raise series A can be a key indicator of how much to raise during the seed round, though startups will go through multiple funding rounds before achieving full profitability.
When setting the total amount, take into consideration what progress the funds will lead to. Next, look at what percentage of dilution this will require (selling stake to investors). On average, founders tend to dilute anywhere between 10-20% during their seed round. Although this percentage can be higher when seeking seed venture capital.
The above should also be noted before selecting the type of investor for funding. As different financing options hold different benefits and downsides (e.g. convertible debt, safe, equity), it is important to keep a holistic view of what investment type will best accommodate the future prosperity of the company.
In any case, the amount to raise should correlate with a believable and credible business plan. Additionally, you should ensure that sustainable growth can be maintained (more capital = faster growth), being too ambitious can lead to unmanageable growth.
There are some rules to be aware of before engaging in the seed investment round. Being aware of the basic principles can help in avoiding these common mistakes:
A critical rule to follow is being aware of the company’s proper valuation because this determines the potential ROI. Next to this, founders should consider how much control over the company they want to maintain. Here’s a list of other rules to follow:
You could make reference to the services that Volta provides and the profile of the company that they work with (but you might want to check this with Vincent before writing).
