Any business is likely to undergo different stages. But it needs proper nurturing at the startup stage to grow & become big. One of the most crucial components of any business is finance. Seed funding is when funding is availed at the nascent stage, while seed money is the capital invested.
What is seed capital?
Ethnically, it is stated as the initial capital necessary to start a business. It is mostly derived from families, friends & founders. It is often mistaken to be a fund that is necessary to avoid using personal cash & cover initial expenses. This type of funding is essential to meet expenses related to initial stage operations, product development and market research. This fund allows you to explore new ideas & convert the same to a viable service/product to attract venture capitalists. Moreover, it is the basic task to undertake for Series-A funding. As a startup owner, you need to have a proper map showcasing clearly how you plan to use this capital. It should be utilized in a poorer manner and ensure a smooth transition from nascent to the advanced stage.
Risky affair
During the ideation stage, predicting the business future can be tough. This also holds true with seed funding. The latter is viewed by venture capitalists & banks as ‘at risk’ option to make investments. Fund providers will be more interested to wait to find out the development of the business. They will also want to know if it is feasible or not. It is the founder who has convince the investors of his/her business ideas to provide seed money. This again depends on his track record, skills & the benefits offered by his services or products. Investors will also want to know what benefits they can derive. As a startup founder, you need to consider applying for seed funding only after evaluating your requirements & risks. You receive funding against some equity of your company. More funding received from others will translate to having more co-owners & reduced control over the business.
How much seed capital to raise?
Some are of the opinion that you should generate a good amount of money to reach quickly the profitability stage. This will also mean not having to raise money in the future. But this is not possible while starting the business. You can go through the given below factors.
- Discuss in detail with your investors as they might provide funding to new startups with great & feasible ideas. Seek suggestions to ensure better finance management.
- Compare initial requirements & cash burn estimates every month and accordingly provide investors with a proper presentation.
- Being stringent will only make you get under-funded. Also, avoid approaching investors with excess buffer. ‘Overpriced’ business is not favored upon by investors. The buffer amount kept should be less. It should be only that is required to get across to the next funding stage & on achieving the set milestone.
- Map crucial milestones or timelines to achieve and come up with a proper estimate. This will provide a clear financial roadmap to follow, while investors will feel confident in making investments.
Formalities to follow
When trying to get seed money, the involved paperwork is relatively straightforward & less. Also, you need to pay very less legal fees unlike that of seed equity. You also have to pay less interest rate. Moreover, no restrictions are present as to how your business functions during the nascent stage.
Seed capital can help fresh ideas to be transformed into a grand reality. Hence, avoid getting lured by any amount that is offered to you. Rather get to know your returns, payment terms, holding within the organization along with investors’ vested powers. But do make sure that the investor is satisfied with your business concept & execution plan.
