Financing a new business can be challenging for entrepreneurs. While there are potential barriers to seed money, such as a lack of savings or an inability to take out new loans, there are also many alternatives from which an entrepreneur can raise the money she needs to get started. Knowing how to obtain seed money from various sources can help you raise capital and prevent debt, while allowing you the freedom to focus more on ensuring the success of your business.
Seed money consists of any funds that can help you in launching your business. The majority of start-ups are self-funded, according to a 2013 survey by Legal Zoom and the Ewing Kauffman Foundation, with 66 percent of those surveyed using only their own funds for their business launch. After the 2007-2009 recession, banks became more cautious in their lending practices, hindering loan availability for small-business owners. As a result, many entrepreneurs began seeking alternative financing for their small businesses, including micro loans, crowdfunding, and peer-to-peer lending, according to USA Today.
In the Legal Zoom survey, 30 percent of recipients reported lack of credit availability as the most significant challenge during their launches. As banks tighten their belts, alternative loan options through peer-to-peer and microloan lending are now being sought by new business owners. New entrepreneurs are also seeking free money from public and private grants, investors and investment firms, and crowdfunding websites such as Kickstarter and GoFundMe to reduce their initial debt load. According to Forbes magazine, the top seed fund investors in 2013 included 500 Startups, Andreessen Horowitz, SV Angel, Lerer Ventures and First Round Capital. The Small Business Administration and Grants.gov provide federal grant information for small businesses. The Foundation Center is another helpful resource that provides information on foundation grant money for small businesses.
When preparing to meet potential investors or lenders, you must be prepared to show them your worth. It is important that seed-funding individuals and organizations have a clear understanding of what your business is all about, what makes it unique, and whether or not there is adequate demand for your product or service. Forbes recommends pitching your story to as many potential investors as possible and demonstrating your ability to efficiently manage resources, research the market and meet with potential customers, and demonstrate your plan for developing and growing your business. Tech Cocktail recommends using your network to make connections for funding and support and welcoming positive and negative feedback so you can better succeed in meeting your investors' or lenders' requirements.
Asking for Investments
Before reaching out to lenders and investors, it is important to know how much capital you will need. Calculating initial investment costs and business maintenance costs can be tricky to gauge as some costs are fixed while others will fluctuate or be irregular costs, but once you know how much you will need to get started, you can determine how much you want to allocate from your personal savings, how much to strive to obtain from grants or investors and how much you are willing to receive in loans. Another thing to consider is the size of the industry and the potential for sales, because this will determine your value to an investor and thus your asking price. When presenting figures to an investor, it is important to keep in mind what is fair and equitable for the investor as well when calculating the percentage of equity you allot or the potential return on investment.
- Merriam-Webster Dictionary: Seed Money Definition
- Intuit: Where the Start-Up Seed Money Is
- USA Today: Creative Sources of Seed Money
- Forbes: Money For Start-Ups: Top 10 Seed Funders of 2013
- CNN Money: Free Cash for Your Business
- Forbes: 4 Tips to Raising Seed Stage Capital for Your Start-Up
- Tech Cocktail: 5 Smart Ways to Get Seed Funding for Your Start-Up
- Business Insider: How to Figure Out How Much Seed Money You Should Raise
Nicole Manuel is a finance and economics writer with a degree in economics and more than six years of professional writing experience. She is also a Certified Professional Coach (CPC) known as The Personal Eco-nomist, who specializes in helping people live healthy, abundant lives on a budget.