What is seed funding?
Seed funding refers to the initial sums of money a business venture raises, the seed funding represents the initial equity funding stage. The early investment that seed funding provides to a business is normally used to facilitate business growth and stimulate income generation.
For new businesses, seed funding, also known as seed capital, is an essential component of business investment.
The name ‘seed’ funding comes from the analogy for the planting of a tree, with the seed being the first foundation for further growth.
New businesses have startup costs which include equipment, wages, rent, utilities and much more.
Seed funding can help new businesses with access to funds early on so that they have them available to meet the initial startup costs and potential growth.
What is seed funding used for?
Seed funding is essentially equity-based funding, which requires investors to invest money into the business at the very early stages.
In return for the investment, the investor is given an equity stake. An equity stake is a share of the business.
The seed funding arrangement is mutually beneficial for both business and investor. The business receives essential capital to begin trading, and the investor acquires some ownership of the business.
For any startup that wants fast growth, seed funding plays a big part.
High growth often requires high capital in order to sustain the growth. Seed funding can provide new businesses with a competitive advantage, especially when they are navigating unpredictable business territories.
How much seed funding does my startup need?
Ideally, you should be able to raise enough money to reach profitability. Not only will this make it easier to obtain funding in the future, but you’ll also be able to operate without additional financing if conditions get tough.
Alternatively, you may be looking to raise enough cash to get to the next milestone of your product’s development before looking to raise the next round of funding.
Requirements for Seed Funding
Before you can obtain seed funding, it is important to have the following steps completed to ensure that you get it easily. Here are the things that you need before you go looking for seed funding:
- Create a legal business entity by incorporating it as an LLC, S-corporation, or C-corporation before you can do any task from your business. Moreover, you cannot get any kind of funding just with a business idea as you need to show that you have a business incorporated.
- Apply for a business registration and trademark registration for your brand name and logo for protecting the identity of your company. This is important as if your company grows, you would have many competitors, and you do not want people stealing your ideas.
- Create NDA Agreements for securing the technology and ideas that you are using while you pitch your idea in front of investors or firms.
- Apply for the provisional patent to protect the technology you have.
- Prepare for all the company filing and tax regulations as soon as you register your business, which also includes keeping a cap table and updating it for new transactions taking place in your business.
- Create a projected balance sheet for your business, which has the financial plan for the next 18 to 24 months, defining where you need money and why you need it. Ensure that it has the monthly actual since investors normally look at this more.
- Design a Stunning Pitch for the investors and ensure that you nail the explanation of your idea and the whole market size. Add details and back up information for everything.
After you have done all these things, you can request for seed funding. Search for the VC firms or angel investors who can fund your company and contact them.
Essential Advantages of Raising Seed Funding
Still not entirely sure why you need seed funding when you can use money from your pocket and begin working? Well, the following points would give you a much better idea of why it is vital:
- More flexibility to adapt and shift course, as per the market demand.
- Helps in company funds and the need for more capital for future rounds.
- More time to join with effective business partners.
- More liberty to tune your business model.
Now that you are clear about the seed funding, there are other things attached to this like the Series A, B, C and so on. But these rounds of fundraising are not the same as the seed funding. If the seed funding round means that you are planting a tree to root your business for having a strong foundation, the Series A means that you are helping the tree grow branches.