Seed Funding - Opening up a World of Opportunities for Startups
Startups and innovative, new ideas need funding. Seed funding describes the investment while seed capital is what the business utilizes this funding for (to be used interchangeably from this point onwards). Early investments transform what was once simply an idea into a business. Seed Capital is the initial investment into a business to help get it off the ground. There are multiple series or stages of funding a business usually acquires along the path to an IPO or Initial Public Offering (if that is the desired goal). This first step of funding is critical to a budding young enterprise. Let’s look at Seed Funding and how it differs from other forms of early stage investments below.
Seed capital is the capital needed to start a business. Seed funding is an early stage investment usually of somewhat high risk often used to finance seed capital. Seed funding often comes in the form of a security offering where an investor invests capital in exchange for equity in a company. Seed funding is intended to support the business before it begins to generate cash. Seed investments are often sourced from family members, an entrepreneur’s own finances or an Angel Investor. The amount of money invested is often quite small (less than $1,000,000) as the business is usually in the conceptual or idea stage. Unfortunately, seed funding can be difficult to acquire as seed investments are commonly perceived as risky.
Seed funding is understood as risky because the businesses seeking investment are often still in the development of a prototype and/or at the ideational stage. Therefore, the success of the product or service has not yet been proven. When you take a snapshot of 1,000 startups at the seed funding stage, 86% will fail (http://bit.ly/2utoBBU). As businesses grow and mature, continuing to further rounds of funding this percentage decreases, making the businesses seeking investment incrementally less risky ventures.
Getting seed funding is a critical step for early stage entrepreneurs.
Smallbusiness.chron states that seed funding usually ranges from $25,000 to $1 million. Seed funding investments often go towards research and development of a prototype or the general operating costs of an enterprise. Funding at this level is often structured as convertible debt which can be converted into stock at a later point. As seed funding is perceived as risky, investors often demand a larger share of the startup. FundingSavvy and Smallbusiness.chron suggest, therefore, that startups should secure only enough seed funding to continue operating and developing prototypes.
Seed funding in some instances comes from an angel investor who will provide a business with a seed loan. Seed loans are typically simple loans, requiring minimal paperwork and low interest. These are understood as stepping stones and may later be transformed into seed equity. Seed loans are most often given when a startup requires less than $1 million. To learn more about seed loans check out the Startup Percolator.
When the enterprise requires more than $1 million an angel investor may instead prefer to invest in seed equity. Investopedia defines seed equity as an investment in a company through the purchase of preferred stock with voting rights. Angel investors who utilize this option essentially become co-owners of the startup. This is a more complicated form of investment but may be of greater benefit to the investor if further rounds of seed capital are needed.
What comes after?
Early stage funding usually occurs after the seed round and may take place in stages or series. General early stage funding differs from seed funding in the size of the investment and frequency. Early Stage funding usually occurs in two series: Series A and Series B (sometimes continuing onto Series C). FundingSavvy states early stage series A funding is between $2-5 million and Series B between $5-10 million. Early stage funding series and Venture Capital (VC) funding differ from seed funding in the size of the investment and the involvement of the investor in directing the company.
Venture Capital is another form of early funding a startup may attempt to acquire after Seed funding. Although Venture Capital is another form of equity based investment, Venture Capitalists usually have a larger say in company operations, management and general direction. In fact, Venture Capitalists may invest via means which are not monetary at all, such as offering expertise or managerial oversight.
Why do Venture Capitalists invest in startups? Although these investments are also considered risky, they take place at a later stage than seed funding and often come from wealthy investors or private firms who specialize in these types of investments. These individuals or firms are often interested in higher-than-average returns on their investments and therefore understand the need for higher risk. You know the saying, the higher the risk, the higher the reward!
Where to begin—Start with the Seed!
If you are starting a business or have an innovative idea that needs funding, then Seed Capital is what you need and Seed Funding is how to get it! Every startup was built on seed capital. Although finding funding at such an early stage of business development can be difficult there are many investors, firms, and organizations dedicated to helping startups get the seed funding they need.
We have compiled a few sites where you can search for Seed Funding.
Where to find Seed Capital
This post was written with contributions by:
Padmanapan Rao is regular contributor to the Ye! Blog and a Graduate student at Oklahoma State University-Tulsa, USA.
Claire Sterngold is the Media Manager for the Ye! Community and is based in Amsterdam, The Netherlands.
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