The initial capital raised by any startup is called Seed Funding or a Seed Investment. In this form of funding, a stake in the company is offered to investors in exchange for their investment. Seed funding is required for many purposes like acquiring office space and other infrastructural facilities, hiring key personnel, development of a product or service and marketing, but most of all, it is essential for the growth of the business. Without such investment, most startups will fail at an early stage.
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An investor will only invest in a startup when the idea is both compelling and unique, and can transition into a successful business venture.
Investors look at a variety of factors when it comes to selecting and funding a startup, like:
- Whether the startup is based on an innovative and unique concept
- Whether it is built on a scalable technology-based business model
- The background and qualifications of the founder, and his/her passion
- The sector the startup falls in. Startups in the areas of artificial intelligence, fin-tech, healthcare and e-commerce tend to be favoured by investors at present
- Whether similar startups have done well in other parts of the world
- Whether subsequent rounds of funding will be easily available
- The intellectual property owned by the startup
- Whether the startup has a good mentor on board.
An investor will refuse to put his money in a startup which is ill-equipped or inadequately prepared.
Some of the essentials for a startup seeking a seed investment include:
- Business Model: The business model of a startup should be highly scalable so that the investor can foresee the expansion of the business and the returns for his investment. It is beneficial for a startup to have a business model which can easily be scaled up to various locations and geographies. This is one of the major attractions for the investor. From past trends, it is observed that the preference of the investor is the technology-based asset light model. The investors would be more interested in such startups, which are technology-driven and do not follow the traditional office setup. Good backward and forward logistics integration is also essential.
- Product or Service: The special or distinguishing factor of the product or service must be highlighted. Easy accessibility of the product or service for the consumer through mobile and other movable devices also plays an important role. Startups should know how to package and market their products. Even an average product that is represented in a more appealing, attractive and unique way will have an advantage over its competitors. This may seem to be superfluous, but it does affect the buying preferences of customers.
- Dynamic and Skilled Team: An efficient team can very well be the main attraction for the investors. A marvelous idea might be no good if it is not being worked upon by a great team. Every person in the team has a role to play and certain goals to achieve. The key professionals of the startup play an important role in this regard. The founders should be able to put across to the investors the skills and expertise of such key professionals and the benefits that the business will get from hiring such persons.
- Market Strategy: The team should have a clear idea of the target market, the possibilities in that domain, the possible obstacles in that market, any existing or prospective competition, and the finances that work in that market. The opportunities in the target market should be assessed and understood. The startup should also try to adopt a controlled budget and a high impact market strategy.
- Financial and Legal Knowledge: A clear projection of investment required and return expected after a specified period of time (say three or five years) on the basis of rational sales assumptions or background is essential. The business model and such projections should be in sync. The amount of investment should not be more than that which would be sensibly required by the business. Overinvestment might not be a good thing as it will only increase the burden of money that will have to be repaid in the long term.
The startup has to focus on making itself legally compliant and professionally managed from the start, during the investment and after the investment. It creates a sense of reliability and trust among the investors. Professionals such as lawyers would be handy guides to startups when it comes to their investment transactions, IPR protection, non disclosures, brain drain, HR issues and various agreements between developer and customers. If all these are in place, it can contribute to the health of the startup Similarly, having a financial consultant would be of great use for budgeting and putting control systems in place.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)
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