If you’re writing a business plan for a new business venture or new product, one of the biggest aspects to consider is the capital you will need to get your business off the ground. This is a huge part of the business model and business development. Some entrepreneurs start off bootstrapping — fund their own businesses — while some look for additional funding forms of investment in order to launch their startup, such as seed funding.
Capital that comes from outside investors to fund the very early stages of a startup is typically called seed funding, seed capital or seed money.
Seed funding is a form of financing/startup funding for a business. The reason it is referred to as “seed” is because this financing happens at the very beginning of the life cycle of a startup. The goal of seed funding is to launch the business and help it grow so that it can start generating its own revenue. In exchange for the funding, investors receive equity in the business.
Because seed investments are given before the company is making any money, it’s seen as a very risky investment. Traditional lenders like banks and credit unions are hesitant to provide seed money. Many entrepreneurs turn to angel investors for seed funding in addition to their family and friends to get the initial investments they need to get their business off the ground.
Seed funding can be used for any number of different business activities that are required to launch your venture. Because the business is not earning revenue when seed capital is provided, the money can cover product development costs, infrastructure expenses and marketing costs.
Having access to working capital provides entrepreneurs with the ability to work on setting up and launching their business. Plus, having outside investors helps to reduce the founder’s risk in the business. Many times, entrepreneurs invest their own personal funds in the business but still require seed capital on top of that.
With seed investors, a small business can have access to strategic partners. If the investors have familiarity with the industry or business experience, they may be able to provide valuable advice on the specifics of how to launch a new company. Having seed funding can also help a business to accelerate growth and hit its targets more quickly.
Seed funding is typically provided in different rounds that align with the different stages of a startup. This is the most common structure in the tech startup space, though it can be applied to other industries as well. The seed round, which is often funded by angel investors, typically gives entrepreneurs between $10,000 and $2 million. During this stage, the startup is perfecting its product and working to launch the business.
After the seed round comes funding rounds A through D. Round A investments are typically between $2 million and $15 million from venture-capital firms. During this stage, the business has a strategy for long-term growth that it can show the investors.
Round B funding can be anywhere from $7 million to $10 million. At this stage, the business is less of a startup and is transitioning into an established organization. Funding rounds C and D can see anywhere from $50 million to $100 million in funding depending on the growth and potential of the company.
Working with angel investors and venture-capital firms isn’t right for every business. In some cases, entrepreneurs can seek seed funding from other sources such as:
- Incubators and accelerators
- Personal assets
- Family and friends
When acquiring seed money from any source, be sure to take special note of the terms and conditions. How much equity is your company giving up in order to receive the seed money? Is it worth it for your business to give up that equity in exchange for capital, or is there another way you can get the funds without giving up equity?