A Guide to Seed Fundraising: Fundraising, Seed Round, Invest
Everything has a price, including your dream business. Every startup requires equipment, manpower and infrastructure to function and grow. All these things cost a significant amount of money. The money that the owners of a startup initially raise is known as 'seed' capital.
Here's the why and how of getting your company capital and momentum.
Why Do You Need to Raise Money?
A majority of new enterprises will cease to exist without funding through external sources. Often the amount of capital an organisation requires for its operations and functioning is impossible for founders and their contacts to raise on their own. An organisation looking to grow faster requires a significant amount of capital in the initial phase of their journey just to sustain themselves. It takes a while before any profitability can be achieved. Some startups can bootstrap or self-fund successfully, but they are exceptions.
By definition, startups are organisations in the first stage of business and looking to scale up. However, there are many new companies not classified as startups, hence they don’t look to grow their capital or fundraise. Terms like Series A, B and C funding rounds are a part of the glossary of this process that involves growing a business in the startup stage with the help of external investment.
There are many types of funding rounds that startups can take advantage of, based on factors like marketability, the industry and the potential investors’ interests. Many founders also indulge in what is commonly known as angel investor funding or seed funding for startups. This is usually done at the start and then followed by Series A, Series B and Series C rounds of funding. Businesses decide to bootstrap and raise money through external sources when they realise their personal resources won’t be enough.
How Does Funding Work?
There are several participating parties through the seed fundraising process for startups. Make sure you’re aware of all of them before you start.
Firstly, you have individuals looking to get funding for their businesses. These businesses progress through funding rounds as they mature.
The other party is made up of potential investors. These investors support entrepreneurial ventures and invest in businesses they believe in. While they mostly invest if they believe in the business objectives, they are also aspiring for profits. Therefore, almost all investment agreements are made in such a way that investors own a part of the enterprise. As and when the company profits, the investors get their reward.
Analysts carry out a valuation of businesses before any funding rounds begin. This valuation is based on management, track record, industry, audience and business risk. At different rounds, the maturity and growth prospects of businesses continue to change.
How Much Should You Aim to Raise?
Ideally, startups should aim for an amount that helps them achieve profitability, ensuring they don’t need to fundraise again. Success at this stage will help you get through a period of crisis without going down when other small businesses do.
Some types of startups fundraise for a fixed period and require a follow-on round in about 12-18 months. This mostly includes hardware building businesses and other production facilities and on-demand manufacturers.
Deciding beforehand how much you are going to raise will remove several variables from the equation. Make sure you factor in the salaries of any employees you might hire soon.
The seed funding rounds for startups work in the same way as any investment. Investors offer capital in exchange for equity stakes in a startup. Knowing the difference between the different funding rounds will enable you to decode news and trends and evaluate prospective investors and expectations.