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How Do Startups Get Seed Funding

Last updated: August 13, 2022
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Every startup starts with a great idea and a robust business model. Any new business venture requires a financial backing to purchase equipment, rent office spaces, hire employees, and invest in marketing efforts to begin to grow. Every startup needs to secure funding and capital investment from an outside source.


Every startup’s initial capital to begin operations and building their business is called seed funding. Seed funding can come from any source, and unlike a loan, it most likely doesn’t have to be returned. The seed funding for a startup can provide the initial funding for entrepreneurs without the worry about loan payments and stressful requirements they can often struggle to meet when applying for loans.


So how do small businesses and startups receive this kind of cash up front? Read on to learn more about seed funding, where it comes from, and the steps you need to take to secure seed funding for your startup.


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    What is Seed Funding?

    Seed funding is the first initial financial investment provided to a startup to help get the startup off the ground. Usually, seed money can come from anyone who wishes to invest in the company. In return, the startup would provide investors with an equity or stake percentage or a share of the profits the company receives in later stages of development.


    The main function of seed funding is to get the business up and running and provide the essential finances to pay for the initial stages of development. Startups will use the funds to transform their ideas and concept from their business plan and transform it into a running business. The seed funding pays for expenses such as market research, operating expenses, product development, office spaces, team wages, and more if needed.


    Where Does Seed Funding Come From?

    Seed funding usually starts with founders gathering savings to get the initial ideas started, researching markets and customer demographics, creating pitch decks, and investing in prototypes to help them better pitch their ideas to potential investors. The amount founders usually start with is ever enough to get the idea off the ground which is why they seek to get further help from investors who may be able to contribute considerable sums of money to get the business going in return for benefits. Seed funding can come from anyone and can include:


    Angel Investors

    — Angel investors are individuals with a high net worth that will invest in startups in exchange for ownership equity or a share of the profits. These investors use their personal funds to make their investments.


    Incubators and Accelerators

    — Incubators are a collaborative program that is designed to help startups during their beginning stages until they can sustain themselves. Incubators are traditionally non-profit organizations that are run by a group of investors who provide resources to the startups. Accelerators are similar to incubators and provide more structured guidance, mentorship, and access to investors and other resources.


    Venture Capital Firms

    — Venture capital firms are a group of professional investors that run a fund collaboratively to designate seed money to startups in exchange for equity or debt. Venture Capital Firms use various investors’ money to invest in startups.


    Friends and Family

    — Many founders find investors in those closest to them, such as their friends and family. These investors invest more in the people involved than the idea itself. Traditionally, this type of seed funding is more likely to be in the form of a loan to be repaid at a future date.


    Crowdfunding

    — Crowdfunding platforms have grown in popularity where a startup uses a platform for advertising their idea to the public and asking them to invest. Investors in crowdfunding are offered equity and specialized rewards in return.


    Steps to Get Seed Funding for Your Startup

    Planning how you’re going to raise seed funding can be daunting when you first begin, especially if you’ve never had to seek outside investment. You need to show how your company will provide a service or product that will be beneficial for your target market and prove that it can be profitable. After you’ve created a solid business plan and determined how much you need to raise to get your idea off the ground, it’s time to start planning to raise seed funding for your startup.


    Create a Pitch Deck

    — Before you begin reaching out to investors, you will want to create a pitch deck to help you raise money. Your pitch deck is a powerful tool to help you show the value your company will provide when pitching to investors. Your pitch deck can tell your story and give details about your product or service and the problem it solves for your customers. Pitch decks will also include data and analytics on the target market and estimated growth projections for your earnings.


    Choose Your Investors

    — For seed funding, you want to work with someone who matches your values and is more likely to see the benefits of providing funding for your startup. Thoroughly research investors and come up with a short list that includes details on their background, their experience, and if they’re a good fit for you and your team.


    Cold Email and Begin Meeting with Investors

    — Once you have your list of investors, it’s time to start reaching out. There are several ways, but a solid cold email strategy can help you gain traction and get meetings on the books with your preferred investors. Once you get a meeting on the books, you’ll be prepared with your pitch deck to pique their interest.


    Negotiate the Deal

    — Negotiations are essential when working out the details of seed funding with your investors. You want to ensure you are drafting a fair deal for both you and the investors with your company’s future in mind. Ensure everything is in writing before you move forward, and ensure you are specific in details.


    Seed funding provides startups with the funding they need to turn their ideas into reality and transform their startup into a thriving businesses. Securing seed funding doesn’t have to be stressful or intimidating. With a great strategy, you just need to understand the market and your customer and be able to convey key details to convince your potential investors to fund your startup and allow your company to hit the ground running.