A great idea won’t go anywhere without the right resources —
regardless of its potential. It’s for this reason that many
startups and entrepreneurs fail.
Startups need capital to get off the ground. Without capital,
it’s hard for companies to pay employees, stock inventory, or
sell a product. Even companies with low overhead costs need
funding to manage emergencies and study the market.
This is where seed funding comes into play. Seed funding is
used by startups to raise capital. Funding is provided by
friends, family, angel investors, and even other companies. In
some cases, companies receive equity or stakes in the company.
Read on to learn more about how seed round funding works and
how it helps entrepreneurs around the world.
What is Seed Round Funding?
Seed round funding is the first equity funding stage a startup
goes through. In a seed funding round, capital is raised to
help a company get started.
The phrase seed comes from an analogy of seeds that
grow into something more. In this analogy, funding is the
water that helps plants grow, whereas the seed is the startup
or idea.
Seed funding helps companies raise money to research ideas and
develop products. Additionally, funding is used to hire a team
to work on the project as well as to perform market research.
Ultimately, seed round funding helps startups grow into
fully-fledged companies.
What is Pre-Seed Funding?
Pre-seed funding occurs before a seed funding round. It’s the
earliest stage of fundraising and founders, friends, and
family members are the people who contribute. However, some
companies will invest in a startup’s pre-seed funding round if
the value is there. Most pre-seed funding rounds raise between
$0 and $50,000.
How Much Capital is Raised During Seed Round Funding?
Seed round funding is used to raise between $50 thousand and
$2 million. Depending on the startup, as many as 15 investors
will invest during a seed round. Keep in mind that these
numbers vary. Some companies may consider higher numbers as
part of a seed round or pre-seed round.
What are the Benefits of Seed Round Funding?
Seed rounds offer many benefits for startup companies. That
said, the biggest benefit is that it gives startups
flexibility and time to iron out any kinks in the idea.
Therefore, seed round funding prevents things from going wrong
and gives entrepreneurs a chance to do what they do best;
create unique and innovative ideas.
Still, there are more benefits of seed funding and they’re
listed below.
- Extra time to work on ideas
-
The ability to change directions if market changes occur
- More capital
-
Extra money to spend on marketing for other funding rounds
- Time to connect with other founders
- Funding for hiring market researchers
These are only some of the benefits of seed round funding.
What are the Types of Seed Funding?
Several types of Seed funding exist. A type of seed funding
refers to where the money is coming from as well as who is
providing the money.
The types of seeding funding are listed below.
- Accelerators
- Angel investors
- Angel networks
- Bootstrapping
- Corporate seed funds
- Crowdfunding
- Incubators
- Venture capitalist funding
Accelerators
Accelerators are programs startups enter in exchange for
equity in the company. Like other investors, accelerators
invest in growing startups to make a profit. Accelerators will
lend a company resources, financial resources, and provide
shared working spaces.
It’s also important to note that accelerators also provide
mentorship. Accelerators are also challenging for startups to
work with because the application process is rigorous –only
the most promising startups work with accelerators.
Angel Investors
Angel investors are investors that aren’t affiliated with
venture capital firms or lending companies. Instead, they
invest their money into early-stage startups to earn a profit.
In many cases, angel investors invest during the pre-seed and
seed rounds of funding.
Angel investors will often invest in groups. These groups
usually consist of 5 to 15 investors. An angel investment
strategy is great for the seed round of funding and AngelMatch
will help you connect with prospects.
Angel Networks
Angel networks, like AngelMatch as an example, are databases
that connect startups with investors. These networks ensure
that investors are vetted, so there’s less risk than reaching
out to investors on social media or through other methods.
Angel networks are useful for the pre-seed round of funding
and the seed round of funding. Depending on the network, it’s
possible to connect with several angel investors.
Bootstrapping
Bootstrapping is one of the most popular seed funding methods.
It’s popular because bootstrapping is done by founders who
invest money into their company.
Bootstrapping strategies also incorporate money from friends
and family members. Many bootstrapped companies won’t rely on
personal loans or banks for funding either.
Corporate Seed Funds
Some large investment firms will set aside money in corporate
seed funds. These funds have money that’s used to invest in
growing startups. Therefore, corporate seed funds are similar
to venture capital firms in a few ways.
A great example of a corporate seed fund is Microsoft
investing in a technology startup. Microsoft will do so to
enhance Microsoft’s technology and the larger company might
eventually buy the startup when it becomes successful.
Crowdfunding
Crowdfunding is a method of raising money from large groups of
people. During a seed round of funding, a startup may engage
in crowdfunding through platforms like GoFundMe to gain
financial resources.
There are also a few types of crowdfunding. Some crowdfunding
methods provide investors with ownership in the company, while
others give investors unique rewards (typically merchandise).
Incubators
Incubators are similar to accelerators but with a few key
differences. Instead of investing in startups for equity
during the later rounds of funding, incubators invest in
startups as early as the pre-seed round.
Funding from incubators is typically less than from
accelerators but the support an incubator offers is similar.
For example, many incubators provide startups with capital,
help with business plans, and technology. Overall, incubators
are investors who invest in startups sooner rather than later.
Venture Capitalist Funding
Venture capitalist funding is great for seed rounds of funding
and Series A or Series B rounds of funding. Money from venture
capital firms is typically greater than money from angel
investors but venture capitalists want equity in the company.
In fact, many venture capital firms invest enough in startups
to alter the direction of the company.
These firms also have rapid exit strategies of 8 to 12 years
and some will exit early — in only 5 years. Venture
capitalists aren’t always easy to find or work with,
especially because of the paperwork process.
What are the Other Rounds of Funding?
Startup funding comes in waves, so seed round funding is not
the only type of funding. In fact, some startups go through
several rounds of securing the necessary capital to thrive.
Below are the other types of funding rounds.
- Series A funding
- Series B funding
- Series C funding
- Series D funding
What is Series A Funding?
Series A funding is the next round of funding that begins
after seed funding. Like seed funding, it raises capital to
expand the business. During Series A rounds, companies
generate revenue for successful strategies and ideas.
Companies will often have a plan in place and a customer base
they’re attempting to monetize.
Typically, companies raise between $2 million and $15 million
during Series A funding rounds. The money often comes from
venture capital firms instead of angel investors and other
seed funders.
What is Series B Funding?
Series B funding is the next round of funding after a startup
finds some success. After Series A funding, successful
startups develop a client base and prove that the idea is
valuable.
The primary difference from Series A funding is that the
purpose of the funds is different. During a Series B round,
money helps startups expand to meet demand. A firm’s marketing
budget and staff will also get additional resources to help
with expansion.
During this stage, companies receive generous investments from
larger venture capital firms. In fact, companies raise between
$30 and $60 million during Series B funding rounds.
What is Series C Funding?
Series C funding only happens when a company finds initial
success. Companies use Series C funding to acquire other
companies, develop new products, and research the market.
Series C funding is also used to expand business operations
into other countries. For example, a successful company in the
United States will often be successful in Europe too. So,
successful startups hold a Series C round of funding to
expand.
Moreover, Series C funding helps with an initial public
offering (IPO) to boost value. For this reason, many hedge
funds invest in startups during a Series C round of funding.
What is Series D Funding?
Series D funding is another round of funding companies use
after a Series C funding round. However, many companies make
enough revenue during Series C funding, so it’s not necessary
to raise more money. Some companies will continue to hold even
more funding rounds.
Get the Funding You Need Today
Connecting with investors is essential if you want your
startup to get off the ground. With the right investment
strategy and the proper connections, finding the money you
need to succeed is hassle-free. However, connecting with an
investor is easier said than done.
Instead of spending hours prospecting on your own, using
AngelMatch will help you connect with investors.