Seed money is an early investment that helps startups and small businesses grow. In short, seed money is used to support the early phases of a new company.
Here’s What You Need to Know About Seed Fundraising
With so many funding options to choose from, it can be confusing for startup founders to parse through the vast amount of information available and find the best fundraising option for them.
The main distinction between seed and series investments is the phase at which the startup is seeking finance. Businesses raise seed funds during the early development stages.
On the other hand, series funding occurs when an established company has established traction and sales and requires additional funding to continue on its growth trajectory.
Why is Seed Money Important?
Seed money helps you establish and scale your business, even if you don’t have enough resources to finance and build it yourself. While you may have to give up some ownership while acquiring seed money, a modest stake in a very profitable company is still preferable to a 100% share of almost nothing.
Armed with seed money, you have the ability to build a business you may not have been able to otherwise. Because of this, you can think of seed money as an analogy to plants.
Plants need water, sunlight, soil, and the right atmosphere to grow; similarly, startups need money, guidance, and resources to enable them to blossom.
Is Seed Money Right for You?
Acquiring the initial round of investment is a difficult task for any business. But it’s not for everyone. For example, if you want to preserve your equity, avoid debt payments, or dilute equity from another investor, seed money shouldn’t be your end goal. As you decide if seed funding is right for you, do the following:
- Evaluate whether or not your company needs external funding to meet upcoming goals.
- Determine if you are prepared and equipped to shift from the lean business model and pivot to a more scalable or market-relevant business model.
- Consider your finances. If you don’t want to overextend your personal savings and credit—and risk—seed money could be a viable option.
- Decide if you have the time to dedicate to fundraising without compromising current goals.
- Create a plan that outlines how much money you would need to raise to achieve your goals. Write down where raised money would be allocated.
Types of Seed Money
It’s important to understand the various types of investors and routes you can take to acquire seed funding. There are several options to choose from and each option comes with its own set of pros and cons.
Incubators
Incubators provide workspaces, seed financing, mentorship, and coaching to help entrepreneurs address some of the challenges associated with starting a business. Incubators typically offer lower amounts of seed money in exchange for other incubator perks. Most incubators culminate in Demo Day, where you’ll be able to pitch your company to a room of investors.
Angel Investors
Angel investors are small-scale investors that offer seed funds in return for a share of the company’s ownership. Angel investors typically invest in companies that show promise and potential.
Corporate Seed Funds
Entrepreneurs with solid products can use the corporate seed funding to pitch large firms like Apple or Google. Tech giants frequently view startups as a potential source of revenue, intellectual property, or potential acquisitions. This is an excellent source of early investment since it provides startups with exposure.
Crowdfunding
Crowdfunding is the process of obtaining small sums of money from a large number of individuals to support a project or business. Over 500 specific crowdfunding sites actively provide financial assistance for up-and-coming firms that are available to startups. Popular crowdfunding platforms include Kickstarter and Indiegogo.
How to Find the Right Angel Investor
To make the best choice for your business’s funding, you’ll have to understand the subtle differences between an angel investor and a venture capitalist.
A venture capitalist is an individual or company that invests in startups by pooling funds from financial institutions, major corporations, pension funds, or other resources. In contrast, an angel investor invests with their own money.
Angel investors tend to take on more risk than venture capitalists. Unlike VCs, angel investors aren’t bound by banks and institutions. Angel investors can conduct as much (or as little) due diligence as they’d like, while venture capitalists must conduct thorough due diligence due to obligation to their partners.
While angel investors provide funds to early-stage businesses, venture capitalists make investments in more established companies to aid in their strategic expansion. A venture capitalist expects more return and higher ownership.
While an angel investor also looks for business equity, they often become mentors as well. AngelList is a good starting point to find potential investors.
Moving Forward
Deciding to raise money is never an overnight decision. You have to weigh the risks and the rewards. But if you do decide to move forward, the first thing you should do is gather your financial statements and create a business plan.
A business plan outlines your mission, current position, and helps investors understand what makes your business a worthwhile investment. Start by downloading a business plan template for free. You can find downloadable business plan templates for all types of industries.
They’ll provide you with a solid foundation of where to start and can offer valuable inspiration.
Begin shortlisting potential investors whose portfolios align with your business. Take a look at other companies they’ve funded, paying particular attention to the stages companies were in when they were funded by your potential investor.
Always have a clear financial plan for fundraising to help mitigate risk and avoid undisciplined spending.
Bio
Dave Lavinsky
Dave Lavinsky is an internationally renowned expert in the fields of business planning, capital raising, and new venture development. He is the co-founder of Growthink, a firm that has helped over 1 million companies develop business plans to start and grow their companies and raise billions in growth capital. Read the most recent Growthink review submissions to learn more about the company.
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