Seed money, also known as seed funding is the early stage of startup funding series. About 29% of startups fail due to their struggles in raising capital through funding. If you’re among the struggling few trying to understand how to raise seed money, let’s not waste time and dive right into the topic.
Why Should One Consider Seed Funding?
The next question obviously boils down to why startups opt for seed funding? In contrast to the traditional methods of raising capital, here the business owner is not on a deadline to get the return on investment – ROI, hence he focuses on product development and market research to launch the product.
Generating Seed Money for the Business
Most startup founders look within their own households when it comes to raising capital for their venture(s). It makes sense, as no one wants to affect their credit ratings and risk getting stuck in a debt that would leave them in a dire mortgage situation. When generating funds in this stage of the startup, business owners can explore three avenues, including Friends and Family, Angel Investors, Micro VCs, and Crowdfunding.
1. Friends and Family
Being a part of a close-knit community, startup owners will aspire to find investors within their close circles and neighborhood. They know that friends and family care about one’s ambitions, hence the payback time and criteria aren’t are rigid. Additionally, this round of funding – as the name suggests helps generate between $1,000 to under $200,000 for the startup owner’s initial investment.
2. Angel Investors
Stepping up the investment pool a notch, one can find investors outside their neighborhood. These investors provide a larger chunk of money as compared to friends and family. On the flip side, these investors are more cautious about the business idea and seek returns along with the business plan.
It’s understood that these investors are risk-taking individuals as they place a sizable chunk – based on their own savings and investments, into the business that is still in its ideation phase. Hence, most of them are a little more rigid in terms of ROI as compared to friends and family. Moreover, a startup owner can generate anywhere between a five-figure to a six-figure capital through these angel investors.
3. Early Stage Venture Capital Firms
The criteria required to generate funding from the micro venture capital (Micro VC) firms is not for the faint-hearted startup owners. Startup owners who are well grounded in the core of their venture’s idea; those who are willing to compete as their market research is on point; and those who can’t contain themselves from talking about their business idea. Members of the VC tend to conduct a lot of scrutiny over the business plan as they intend on raising portions of equity here.
Firms such as Andreessen Horowitz and 500 startups make startup owners compete by pitching their business venture and defend their business strategy. The catch here is that the business owner has an opportunity to raise a significantly larger capital as compared to friends and family, and angel investors by convincing the venture capital firm’s representatives.
As the name suggests, it is the public that funds the business idea. These fundraisers tend to find out about the business venture through social media and other online platforms.
Usually, the business idea is a presentation pitch with a simple idea. It’s followed by a problem statement regarding something lacking in the current ecosystem, and how this business venture solves the problem. The pitch then explains the goal and then invites the public to fund the business idea. In simple terms, crowdfunding reduces the time an entrepreneur needs to spend on constantly presenting their business idea to investors. Here the backer reads about the venture and invests, so there’s a lot of emphasis on the pitch.
Details about the venture must be accessible on an authentic online platform. Investors keep checking in on this platform to read about places to invest and then connect with the entrepreneur, without fearing that this might be a scam. Hence, with the presentation already out of the way; if the investor and the business owner now wish to meet, they have their work cut out for them. This raises the success rate of this meeting as they tend to discuss minor details, only after understanding the main idea of the business.
In a Nutshell:
Seed Funding is the primary phase of the startup funding stages, where the startup owner raises capital to invest in product development and market research. There are multiple avenues, the owner can use to generate funds.
Friends and Family Round: Raising capital through friends and family. It’s not are rigid and thus has lower funding bracket.
Angel Investors: Risk-taking professionals who invest in startups knowing it’s risky but has a high return.
Micro VCs: Venture Capital firms that lend out funding based on the business owner’s business plan, strategy, and how they compete for the pitch. Funding generated here is the highest and has more rigidity than friends and family, and angel investors.
Crowdfunding: A process where investors seek out startup ventures and fund the business idea.