Starting a business can be an expensive undertaking, and without the proper personal loans to get it up and running rapidly, you run the risk of losing capital, and even going bankrupt from the loss of success you initially anticipated.
When an entrepreneur lacks the adequate financial resources to kickstart their business, they have to rely on fundraising. This is where seed funding makes its appearance.
Basics of Seed Funding
Seed funding is an early investment in new businesses to bolster the company and ensure its success in the long-term. It is the very first stage in equity funding for startups and typically the first capital that a business raises. Investors who dedicate capital to a startup’s growth are depending on the entrepreneurs to lead the charge into the business world and generate high success rates and profit.
This initial investment gives the business owner the opportunity to take the next steps of development by hiring employees, renting out an office space, procuring marketing and advertising assets and materials to enhance your product design. If your start-up is focused on high growth and success from the beginning, you may find your initial funds dry up in order to sustain your business before you begin to see profit.
Seed funding for startups is generally considered a risky endeavor due to the high rate of failure. Investors who take the riskier chance of financing a startup may ask for equity in exchange. Traditional financial institutions typically do not offer seed funding to companies that are at the beginning stages of their growth.
On the bright side, there are many investors willing to help new businesses go the extra mile. But without properly understanding seed funding, the process may be arduous and perplexing.
Why Should I Raise Seed Money for My Business?
If you find yourself asking this question, know that there are several potential benefits to raising a seed round for the initial stages of your startup.
The upsides to seed funding are as follows:
- You protect your personal assets and risk losing finance to support your business. Many entrepreneurs have compromised their own personal funds to subsidize their expenses. With seed money, you are able to take on this capital-intensive task of creating a startup.
- Investors can provide not just financial support, but also strategic business advice for your company to grow. If you are a young entrepreneur navigating the business world all on your own, your investor can help guide you through to success.
- Expeditiously expand your business whether that be through your services, products, or staffing. With a bigger spending budget, your products and services will inevitably attain higher quality and give you an advantage over the rest of your competitors.
Just like a coin, there are two sides to seed funding. Even with the amazing benefits, there can be disadvantages:
- In order to secure funding, most investors require equity from the new business. Entrepreneurs that are compelled to share their equity with investors in exchange for capital could see a loss worth billions of dollars in the future depending on your success.
- Loss of control over the company is possible. Even if you are the sole founder of your business, investors could potentially eject you from the company.
- Those who choose to invest in your company may demand more than what you had hoped for. This is especially true in the case of early-stage companies and is an inherent risk when raising seed money.
- Regulatory compliance associated with seed funding costs your business, and maintaining these regulatory requirements can put a dent in your capital.
When Should I Start Seed Funding?
Deciding when to start raising your seed money isn’t as easy as it appears. Some entrepreneurs choose to hold on to as much equity of their company for as long as possible. Others might avoid working with investors and resort to bootstrapping, which is the process of starting a company with only personal funds and savings, including borrowed capital from family and friends. If your business is already seeing an initial profit, you can self-finance without the support of bank loans or investments.
For the more ambitious entrepreneurs who are seeking to rapidly expand, bootstrapping will not suffice in the long run. These startups need a large amount of capital in order to achieve their highest potential and should plan to come up with the seed money only after assessing the market opportunity, rate of growth, and customer segment for their business.
What to Consider When Raising Seed Money
Consider this as a basic checklist for whether your company needs to raise seed money or pursue other financing options.
- Know the estimated valuation of your company. This is critical to determine whether you should raise seed funds and if it is realistically possible.
- Determine how important having control is and how much input you want to provide in terms of the company’s strategy and operation. You must understand this before you begin working with investors.
- Research your company’s market niche and the opportunities that exist to determine whether it is sufficiently large enough to reach a return of investment.
- Other ways to fundraise, including crowdfunding and small business administration loans, are effective alternatives to achieve your goals without relinquishing equity of your business.
How Much Capital Do I Need for My Startup?
There are many variables that influence how much you need to start your journey as an entrepreneur. These include rate of business growth, dilution of equity or ownership, and staffing.
Most seed rounds require between 10-20% of equity before investors commit to funding your startup. Experts recommend no more than a 25% dilution for your company.
New entrepreneurs typically underestimate the total amount of capital required, to not only get their business off the ground, but also to sustain, manage and expand. Your best bet is to raise enough capital to reach your next funding milestone.
“Without a realistic and convincing plan, your company will fail to successfully win investors and raise funds for your venture,” says a representative of Newchip Accelerator Reviews. There is no special formula to predict the future in an ever-changing world, but creating multiple plans for multiple scenarios shows that you are ready to tackle challenges.
Is Seed Funding the Right Option?
Seed funding is extremely beneficial to any startup that requires a large amount of capital to launch the business forward on the path of success. If you are considering seed round as an option to raise money, you must consider the several factors listed above, including how much equity you are willing to hand over, payment terms and a process of accountability for both the investor and entrepreneur.
Most startups do not immediately see a profit and can very easily lose out on all investments made and inevitably shut down. An alternative to working with investors for raising capital is to apply for business loans from banks. However, most banks charge high monthly interest rates and might also be a financial burden for the company.
Overall, seed funding may be your best choice for your business to succeed. It provides you with the relevant resources, talent, and skills and encourages growth. It may seem like a longshot, but it is definitely worthwhile in the long run.