Startups need to raise money in order to accelerate and sustain their growth. In case you are a first-time founder and your company is still in the proof-of-concept stage or at a stage where you are not yet generating enough revenue to support your growth. You may be able to cultivate pre-seed funding from investors to take your business off the ground.
You have to prepare your startup business to take investment from third parties before you learn about how to get seed funding. Now, the question is how to prepare a startup for seed funding. It is not just about finance. It also includes legal issues and various other tasks such as hiring a workforce. You need a clear idea of how you will structure your business and how it will work -- only then will you be ready to raise your seed funding through an equity round.
Note that seed capital comes in the initial stages of establishing a new business. It usually includes a smaller sum of money, such as from tens of thousands of dollars to several million.
Before we dive deep into seed funding, we must be familiar with some basic terms.
What is Seed Funding?
Seed funding is the earliest form of capital a startup will raise. It is a startup's earliest funding stage. Oftentimes, seed funding comes from angel investors, friends, family members, and the company's original founders. An early-stage startup might also look for financing through bank loans, but angel investments are usually preferred.
The seed funding method is used to finance the company itself, and it has relatively high risk, as the company has not yet proven itself in the market. There are many angel investors who focus on seed funding opportunities. It helps the investors buy a part of the company's equity (after sweat equity negotitaions) when the company is at its lowest valuation. Seed funding is integral to getting ideas off the ground.
The Purpose of Seed Funding
The goal of seed funding is to give a founding team enough capital to pursue a particular idea or market to prove in case the concept works. Several investors may have added requirements for a seed-stage company, but generally, all they seek is "product-market fit". And from product/market fit, they mean being in a good market with a product that can serve and thrive in that market.
Seed funding may vary in size quite a bit from company to company and investor to investor. Investors provide a startup with capital, which can sometimes also be up to $2 million to develop and promote its product in return for equity in the company.
Pre-Seed Funding
As the name suggests, pre-seed funding is an early funding round. Pre-seed funding is what comes before a fully-fledged seed round. This is the stage wherein the first costs of starting a business is covered. One may also raise money from friends, family, or other supporters rather than from independent investors who are looking for a profit.
A pre-seed startup investment phase is the one that precedes Seed and Series A rounds. It may follow funding from an angel round and is practically a period of bootstrapping with your financial resources. The number of companies that receive pre-seed funding is relatively low because so many early-stage startups are looking for financial backing. Investors might consider thousands of startups but only invest in a few.
Continue reading to learn how to boost your chances of an investor preferring your startup for pre-seed funding.
When is Your Startup Ready for Pre-Seed Funding?
No one rule applies to decide at what moment your business is ready to raise a pre-seed round. Still, there are numerous indicators that indicate taking the right decision.
- You possess an MVP, which is a minimum viable product that gives early signs of traction.
- You can display potential for the product-market fit.
- A strong founding team with appropriate background and experience.
- You have begun onboarding clients to use your product or service.
- Your business has already started generating revenue.
- It would be best in case you had cash to develop your prototype.
- The company is ready to make critical hires.
In any event, all your businesses should only raise money if you need capital to continue product development and expedite the growth of your idea or business.
The Difference Between Seed Funding vs. Series A Funding
The next phase of the company's funding lifestyle is Series A. As a seed round is the first capital into a business, "Series A" generally comes after it. When a company is first founded, the stock options are sold to the company's founder and angel investors. After this, one can also sell the company's preferred stock to investors, which falls under Series A. This type of funding allows various investors to be a part of the business that they truly believe in. It simultaneously benefits the company, the investor, and the future stockholders.
The moment a company reaches their "Series A" phase, they likely have product-market fit and are ready to scale their business to a $1M or more in revenue. You probably have stable revenue in a place at Series A and a scalable plan to bring on more customers and revenue where you may have little to no gain at the seed round. A seed round can be used to illustrate your product, service, or team can seize a market. At a Series A round, one can scale the product, service, or group to attack and scale in a particular market or a new market.
Things You Should Know About Seed Funding
Plan for the Long Haul
Raising funds is a process. It will definitely take time, more time than you estimate. It can take a minimum of three to six months. In case you have had an exit in the past, it can take four weeks or less, but in case this is your first rodeo, prepare for at least six months. Ideally, if you have co-founders, one of you can give the majority of your time to fundraising. It will be less painful and more fruitful to divide and conquer.
Manage Your Runway
The second piece of advice goes hand-in-hand with preparing for the Long Haul. It is extremely important it is to manage your runway. The "runway" for your company is the amount of time you possess until your startup runs out of cash, assuming your income and expenses remain constant. One needs to be able to confidently and credibly back up your runway explanation, too.
The risk of fundraising with too short a runway implies originators can get pushed into a tight spot. What happens when it requires nine months rather than a half year to raise capital? What happens when the investor acknowledges you have a month and a half runway left and delays to the point of no return and improves cost? Make sure to investigate other financing alternatives, for example, debt, grants, and public support. Depending exclusively on investors could place you in a crisis.
Always Be Networking
One of the most important things you can do in order to grow your business is Networking. One shall not underestimate the power of relationship-building. It is highly recommended to network and build a relationship with investors before you initiate fundraising. If possible, you can even ask for feedback on your product or service. It will help you a lot.
Later, it will be much easier to pick up the phone and ask for money when you already have a friendly relationship. Note that VCs are a busy crowd. Make sure to value their time. Overstepping your boundaries could backfire on you, and know that it's a small, tight-knit community. Everyone is networking, so a small mistake of yours could cost you a lot.
Once you are into networking, you are able to enjoy endless benefits of networking such as building contacts, increased number of contracts, and the most important of all, education.
Embrace Rejection
Understand that rejection is a part of success, and it is going to happen. There will be a large number of your meetings wherein you will end with a "no" or "I will get back to you" (a polite "no"). Ensure that you do not take it personally and keep moving. Never let a failure reach your heart and success to your head. Learn this mantra in order to keep moving forward.
Lastly, in case nothing is working for you or you seek speed and direction, you must hire a professional. There are many people who have ideas and help the world's innovators bring the future to the market. Seek help wherever you get stuck, but never stop!