What Is Seed-Funding In Startup And How Does It Work?
Many entrepreneurs get confused about the technical verbiages and so we have tried to make it simple for their initial stage here. In this article, we will cover the quick ways to raise seed funding and how it differs from the rest of the funding rounds.
Friday October 09, 2020,
5 min Read
You must have come across many words like seed funding, early-stage funding, late-stage funding, and all. But probably have got confused on such verbiages. We will have a quick view of these words and then jump to our main topic of the day, that is seed-funding.
So basically, the fundraised for starting the business is termed as seed funding. The fund raised on the initial phase of business(mostly when the business models do not have the profitability) is said to be the early-stage funding. And the fund that you raise at the peak is termed as the late-stage funding.
If you are one of those hustlers who have a unique business idea but do not have enough funds to work on that, then seed funding is definitely for you. However, it is not as simple as it looks. Raising seed funding also takes some capital, which is called pre-seed funding. Now, what's the pre-seed fund? We will understand this with a simple example.
Let's say you are going to launch a B2B Food Vendor Services App. You have a great idea, a proper business model, and even a profiting exit plan. But how will you pitch your idea to an investor? Will narrating a story in front of an experienced and busy scheduled investor will work more, or should you build a prototype and the pitch-deck first? Well, making a prototype will help you show the practical points of your business model to the investor. To do so, you do not have to make a big team, office, and all, but it will require your time, at least one CTO, a data analysis system, and its records so that you show your best when you confront the investor. These things will require some amount to that you can either invest from your savings or by borrowing money from your trustworthy investors like friends, family, colleagues. So, once you get this pre-seed funding, you will be able to work on the prototype and show the prototype to the seed funder.
Now when, you have already built the prototype, why don't you directly finalize the product and launch it to the market? What is the purpose of this seed funding now? What are all those sources? Let's know why.
Since you have just made a raw product, it never fulfills all the requirements of the end-user. You will need a proper marketing plan. You will have to make a client satisfaction unit. You will have to deal with the legal terms of the business. And, the expansion will require a bigger team as a single person can not handle all the departments for very long. So I hope you must have understood the need for seed-funding by now. Now the question is, who will invest? Our first investors were our known persons, and so they must have more trust in you and the lesser interest in your product, and that is why they invested in it. But now, you have to deal with the persons who are not known to you, who are here to invest money, expecting good returns only. Convincing them is so hard that you will find hundreds of surveys showing that around 99% of overall startups fail to raise the investments on their seed funding rounds. So to be among that 1% of fund-raisers, you have to pass the stage of presentation now. Here's how to do it.
Making a less lengthy pitch-deck is always the best idea than making a big file that is not going to be read by the investor at the time of presentation. Your pitch-deck has to be informative and concise at the same time. It must include your business model, your differentiating factor, your market cap, and of course, the current and as well as required team details. After giving, all the pieces of information, be ready to answer the questions of the investor. They hardly take 2-3 times to go through the details and then ask very basic but most important questions like why only you, and they will make sure you have presented the solution for an actual problem and not just a hypothetical way to earn. If you were able to answer them, you have crossed the most critical stage of the startups.
Seed-funding majorly works on the equity deal. The investors take a fixed percentage of equity on your business, and so when your business expands, they can sell their share for more profit. This process also helps you evaluate the brand. For example, if the investor took 10% of the shares of your brand in return for the one crore investment, your brand ultimately gets the valuation of a ten crore value company. Although, you do not have the actual ten crores with you, so the valuation and the real capital are two different terms. Seed funding can be raised through crowdfunding events, by venture capitalists, by angel investors, and also by sending pitch decks to the businessmen whom you think may be interested in your business model. Making it sure, you do not start spamming over the emails as it may ruin your image for the long term.
I hope I was able to share some informative points on the funding system with you! Get set for your dream-business and I will meet you on the next article soon. Bye!