AI Startup Financing: 6 Best Seed Funding Options in 2022

So you have a new cutting-edge AI product/service idea.

What next?..." Build the Product and Launch It in the Market."

Unfortunately, this is easier said than done!

How can a project cover the numerous expenses of AI product development, and remain financially stable?

This is exactly where seed funding comes in.

What is seed funding?... Seed funding comes before the product/service is ready for commercialization. It covers the early-stage costs of the research and development phase, including prototyping, preparing patents, etc.

Several funding sources include:

Angel Investors
Venture Capitalists
Business Incubators
Crowdfunding
Microfinance Lenders
Deep Funding

Today, we will learn about each in detail to help you decide on the right type of funding option to translate your idea into reality.

Here Are SIX Options to Help You Make the Right Choice:

#1 Angel Investors

Who Are Angel Investors?

Angel investors are wealthy individuals who invest their capital to either startup or expand a business in exchange for equity. They can be high-net-worth individuals, entrepreneurs who have retired from their business, or corporations looking to invest in firms for profit. Angel investors are generally in search of high-growth, early-stage companies.

Angel investors are a good option if you seek a relatively small seed-funding amount. However, your startup is unproven at this early stage, and you will most likely receive a lower valuation than with VCs.

Pros and Cons of Angel Investors

Pros:

Less stringent requirements.
Simple legal paperwork.
Free advice on managing growth using the network of the angel investor.

Cons:

You need to do a lot of presentations before finding someone prepared to finance your project, with no guarantee for success.
The amount is likely to be lower than other seed funding options.

How Much Do Angel Investors Usually Invest?

The average angel investment amounts can range from $15,000 to $250,000. It often depends on the size of the funding round, the availability of angel funding, and the amount required to launch your product successfully.

How to Find an Angel Investor?

Several websites list angel investors, such as AngelList and Guaana. You can also find them on personal Instagram pages or local Facebook investment groups.

What Percentage Do Angel Investors Want?

Typically, angel investors want 20% to 25% of the profit - sometimes 30%! The best advice for entrepreneurs is to ask angels if they would be willing to take a smaller percentage in exchange for an earlier investment or the chance to buy more shares of the company in the future at a discounted rate.

#2 Venture Capitalists

Who Are Venture Capitalists?

Venture capitalists are investors in small, risky companies. They provide funding for startup and growth operations in exchange for partial ownership of the business or an equity stake. A venture capitalist participates in the business' growth and hopes to make a lucrative return on investment (ROI) when it is eventually sold or public.

Venture capitalists make money when their portfolio companies make profits. Venture capitalists focus on high-growth industries, such as information technology, pharmaceuticals, and advanced manufacturing, which can be ideal for an AI project, as AI is seen as an emerging and high growth market.

Pros and Cons of Venture Capitalists

Pros:

You are more likely to get higher funding amounts, especially if you have a strong track record.
The investors will mentor you and help you grow the company.
Venture capitalists will expect a higher return of investment (ROI) than angel investors (approx. 30%), but will take an active interest in accelerating your business.

Cons:

Venture capitalists' terms are more stringent, and there can be a long negotiation process.
There is some risk of losing control of your company due to dilution of your share after multiple investment rounds.

How Much Do Venture Capitalists Usually Invest?

Venture capital firms usually make one or more of the following investments:

Seed round (often between $250,000 and $1 million)
First-round (often between $1 million and $10 million)
Follow-on round (often between $10 million and $50 million)
Expansion round, bridge round, or second follow on (often between $15 million and $75 million)
Acquisition round (often between $50 million and 1 billion dollars)

How to Find a Venture Capitalist?

The best way to find a venture capitalist is by networking and generating a referral from a trusted contact. You can connect with VCs at small business conferences, seminars, workshops, and job fairs. Another way to find venture capitalists is by using the Internet. Many directories and databases list venture capitalists by area of interest, location, and industry. These include Bloomberg, Mattermark, Crunchbase, and more.

What Percentage Do Venture Capitalists Want?

There's no concise answer to this question, but roughly they want between 25 and 50% of a new company's ownership.

#3 Business Incubators

What Is a Business Incubator?

An incubator is a program that provides resources such as management guidance, training, and financial support for startup companies. These programs are run by universities, government agencies, or independent entities.

Business incubators help entrepreneurs with their business ideas and get them to a point where they can survive independently. A business idea must evolve and grow to get accepted into an incubator. In addition, the business owner must demonstrate that they have a sustainable business model.

Pros and Cons of Incubators

Pros:

You will be part of a community that provides you with valuable connections and advice.
There is lower financial risk compared to other seed funding options.

Cons:

You will be subject to a probation period.
You will have less autonomy as you are part of an incubator program.

How Much Do Incubators Usually Invest?

The answer to this question depends on many factors: how much money the incubator has, which kind of seed-stage startup it is willing to invest in, how many startups it plans to accept per year, etc.

Incubators differ widely in their investment strategy. Some incubators accept only a single startup per year and incubate them for free, providing office space and services such as mentoring and coaching. Others invest several million dollars per year in dozens or hundreds of startups and expect a return on their investment within a few years.

In the United States, incubators invest an average of $22,000. In the UK, it is as high as £50,000 per company. In Singapore, the average investment is S$18,000 per company. In Europe, some incubators invest €30,000 - 50,000.

How to Find an Incubator?

Several sources can be used to find a business incubator. They include directories, current and past clients, commercial real estate firms, business development centers/economic development agencies within state government, and the local chamber of commerce. An online search of business incubators will yield a list of potential candidates.

The US Small Business Administration (SBA) provides a directory of over 1,400 business incubators. The SBA has a resource section on its website that contains links to resources for entrepreneurs and small business owners.

What Percentage Do Incubators Want?

The answer is "it depends." Every accelerator has its take on equity. Although the number is negotiable, most accelerators take six to ten percent. Founders who are accepted into the accelerator also get equity in the company. The best way to figure out what percentage an accelerator will want is to ask around!

The following list has popular incubators with their take on equity.

TechStars- 4% to 6% Equity
Y Combinator- 5% to 10% Equity
MuckerLab-8% Equity

#4 Crowdfunding

What is Crowdfunding?

Crowdfunding is the use of small amounts of money from a large number of people to fund a new business, product, or project for a startup. Many businesses are opting for crowdfunding instead of approaching banks or investors to help get their businesses off the ground. In return for their funding, investors can get a reward from the company. This may be in the form of a new product off the production line, an exclusive edition of a product, or just early access to the finished product.

Pros and Cons of Crowdfunding

Pros:

Crowdfunding allows you to raise funds quickly.
It can be a great way to validate the demand for your product or service before creating it.
It is the best alternative if banks or angel investors have turned you down.

Cons:

You have to pay a platform if you choose one of the major crowdfunding platforms like Kickstarter and Indiegogo. These fees can be higher than those charged by banks or other financial institutions.

How to Find the Right Crowdfunding Platform?

The globally renowned crowdfunding platforms include Kickstarter, Indiegogo, and GoFundMe. For more such crowdfunding sites, check out the Crowdfunding websites directory from AngelList. It consists of a list of crowdfunding sites, their category, and contact information for each platform.

How Much Can You Raise From Crowdfunding?

Crowdfunding is a fast-growing way to raise money for all sorts of projects. There are several sites out there, including Kickstarter and Indiegogo. How much can you raise?

The answer is, it depends. The average amount raised on Kickstarter is over $20,000; however, the median amount raised is closer to $5,000. The amount you raise depends on several factors, including your project's funding goal and the time you have to market it. If you set a too low goal, you might not raise enough money. On the other hand, if you set your goal too high and take too long to reach it, you might come across as arrogant or unrealistic.

No formula will guarantee a certain number of backers for your project. The best way to know how many you will have is to look at similar projects and see what they accomplish.

What Percentage Do Crowdfunding Platforms Want?

The answer to this question is that the percentage that crowdfunding platforms want changes from platform to platform. In general, platforms take a small cut of the raised funds.

For example, Kickstarter (one of the most popular crowdfunding platforms) takes 5% of all successfully closed projects, and Amazon (the payment processing company) takes another 3-5% of what is raised.

Some platforms charge fees based on the amount that is raised. For example, RocketHub charges projects 4% if they raise less than $50,000 and 9% if they raise more than that, plus a $0.99 payment processing fee per pledge.

Another category of crowdfunding platforms (and the most flexible for project owners) is the add-on model. Sites like IndieGoGo and Crowdfunder offer free crowdfunding platforms to any project owner that can pay for additional services or products. For example, IndieGoGo doesn't charge any percentage of funds raised for successfully closed projects but charges a 9% fee if the project is unsuccessful. On the other hand, Crowdfunder charges a $299 monthly fee and takes 4% of what is raised if the project owner doesn't purchase any additional products.

#5 Microfinance Lenders

What is a Microfinance Lender?

A microfinance lender is a financial institution that provides loans and other financial services to low-income entrepreneurs in developing countries. Microfinance lenders are non-governmental organizations (NGOs), though private commercial banks and development institutions sometimes operate microfinance lending programs.

The loans are typically small, unsecured loans that provide borrowers with the opportunity to grow their existing business or start a new one.

Pros and Cons of Microfinance Lenders

Pros:

There are no strings attached.
You can get a loan without a credit score.

Cons:

Higher interest rates than traditional bank loans.
The rate of startup funding proposal approval is significantly on the lower side.

How Much Do Microfinance Lenders Usually Invest?

There is no set figure; it varies across the industry. At the same time, it's important to note that microfinance lenders generally invest their funds into microloans. These typically range from $5,000 to $50,000 each. But there are no fixed rules.

Lenders can also invest in pooled funds or loan capital to other microfinance institutions (MFIs). These funds might be invested in other MFIs, using those funds to finance microloans.

Lenders can also invest money through commercial banks, which may fund microfinance institutions. This enables the lenders to lend capital without tying up their capital in microfinance loans.

The amount of money invested depends on the individual lender's tolerance for risk. The more capital they have, the more they'll be able to invest in microfinance, but the riskier the microloans will be.

How to Find a Microfinance Lender?

What Percentage Do Microfinance Lenders Want?

The short answer is +30%, but it varies from one microfinance lender to another.

#6 Deep Funding

The biggest drawback for any of the above fundraising options is that the investors often lack understanding of artificial intelligence technicalities, especially the AI possibilities and market opportunities. Therefore, the rate of AI proposal rejection is considerably high— be it angel investors, crowdfunding, or VCs. But, there is a whole new way to fund and establish AI projects, "Deep Funding."

Deep Funding is a community funding program by SingularityNET, aimed at AI developers requiring seed funds to meet the costs of building an AI-powered project. The process is simple. Aspiring entrepreneurs submit a detailed proposal to the funding website. The proposal will be discussed, and then voted on by community members ( SingularityNET token holders). Successful proposals which receive the minimum threshold of votes, within the funding amount of the given round, will be funded. That's it!

This funding program aims to be a well-functioning and entirely community governed. Proposals that synchronize with the vision & mission of the SingularityNET and supporting the growth of its platform for decentralized AI services will be a priority.

Pros and Cons of Deep Funding Pros:

You don't have to repay
It's open and nondiscriminatory - the community decides.
It boosts recipients' credibility
Form of free advertising - increased visibility
Has a networking effect - AI developers have a chance to integrate with other winning proposers.
There's an already made market for your product (SNET Marketplace)

Cons:

Writing convincing proposals isn't easy - hard.

How Much Can You Raise From Deep Funding?

A winning proposer can get up to $150,000 in funding out of the available $1,000,000.

What Percentage Do Deep Funding Want?

Deep Funding organizers don't ask for any percentage in return. However, there's a little string attached. Projects must align with SNET's vision of building a decentralized and benevolent AGI, and it must also support the growth of the SNET AI marketplace. For larger projects, we have Four 'user-friendly' templates for revenue sharing, here you will get all the details: Rules & Guidelines – Deepfunding

Let's Wind Up

If you're an AI startup, it's essential to know the best seed funding options to get your business off the ground. We've outlined six of the best options for financing your company in this article. We hope that this information will help you choose the right path for your business and enable you to reach new heights in the field of artificial intelligence. Are there other seed funding options that we missed? Let us know in the comments below!