Without funding, most startups
fizzle out before reaching their full potential. So it follows that a startup's
seed round — the first round of official fundraising — is critically important.
In order to maximize your chances
of success, you'll need to understand the basics of seed funding, including
when to fundraise and how to draw in potential investors. Here's what you need
to know.
What Exactly Is Seed Funding?
Most startups have sequential
rounds of fundraising called series A, B, C, and so on. A seed round is the
first official round of fundraising, and seed funding is the capital your
business gains as a result of that round.
In many cases, businesses start
out with funding from the owners, their family members, and their friends.
Unfortunately, those resources are rarely enough on their own. To have a better
chance at success, most companies will need additional capital from investors.
How much you can expect to gain
from seed funding will depend on your industry and a few other factors. Fintech companies tend to be especially successful when it
comes to seed funding, as many investors believe these companies have the
potential to become highly profitable.
Who Invests in Seed Rounds?
What type of investor should you
seek out during your seed round? Angel investors are usually the first to
invest in startups. These investors use their own money to invest in very new
companies with low business valuations.
They typically do so in exchange
for a portion of profits or a certain amount of equity in the company. Because angel investments are very
high-risk, angel investors can typically get a substantial stake in the
business. If the business fails, the angel investor loses their money. But if
it succeeds, they can potentially make millions.
Sometimes, venture capitalists
will invest in seed rounds, though they usually wait until the company has
demonstrated a bit more growth and profitability before investing.
Unlike angel investors, venture
capitalists usually invest other people's money in hopes of making a profit.
Most venture capital comes from venture capital firms rather than individuals.
How Do You Attract Potential Investors?
If you can show that your business
is likely to become profitable, there's a good chance that an investor
somewhere will want to invest. Once you've gathered what you need to make a
convincing pitch, the challenge is finding that investor. Here are some tips on
how to choose which ones to approach:
● Do
Your Research: Many investors
have a special focus when it comes to investing — look into an investor's
portfolio and make sure your business fits in before approaching them
● Understand
the Investor's Style: Some
investors want to be more involved with your business, and others want to be
more hands-off — it's up to you to decide what you're comfortable with
●
Make Sure You Get Along: Since many investors will be at least
somewhat involved with your business, it's important to choose someone with the
right personality
Of course, finding the right
investors is just part of the process. Before you schedule a meeting, make sure
that you have prepared a detailed yet concise pitch deck. You should be able to
explain your marketing strategies, the current value of your business, and your
company's financial forecast.
Just about every potential
investor will quiz you on your business. They want to make sure you have a
solid business plan, so show up ready to answer questions!
When Is the Right Time to Start Raising Seed Funding?
There's no universal rule for when
you should start seed funding. However, you should have determined at least
these two critical points: (1) what market opportunity you're targeting and (2)
who your customer base is.
When you have these points in
mind, your business will be able to hit the ground running once it has the
capital it needs to get started. You'll also be able to gain the confidence of potential investors, as they'll see that
you have a clear plan.
In many cases, it's also wise to
wait to start raising seed capital until you have made some sales. You can use
these sales to demonstrate that there's a demand for your product or service
and that customers will buy it.
If you haven't made any sales yet,
make sure that you have a system in place for reliably selling your product.
This system will show investors that once you have the capital, you'll be able
to start selling and generating revenue immediately.
In some cases, angel investors may
be willing to invest in your company before you've generated any revenue. In
this case, you'll find more success if your company has some traction, often in
the form of pre-sales, beta testers, or active users.
Getting Your Business Off the Ground
Seed rounds can be daunting, but they're a crucial part of steering your startup toward success. Before you start, make sure you have a detailed business plan, a list of potential investors, and a solid pitch. These aren't easy steps, but once you've completed them, your business will be ready to move to the next level.
