A Comprehensive Guide for Startup Founders to Seed Funding: The Why, How, and When
Obtaining the initial capital needed to launch a firm is one of the significant difficulties entrepreneurs often confront. Despite the development of a vibrant startup culture in India, the lack of seed funding for startups poses a major problem, thanks to the frequent funding winters.
Also, many investors hesitate to invest in early stage startups since they are mostly unfamiliar with seed funding. It makes startup fundraising a severe issue for business owners who need more capital to launch their ventures.
However, seed money is essential for startup owners to cover preliminary expenses such as employing human resources, leasing office space, purchasing supplies, and building their tech stack.
This guide offers an overview of what startup founders should know about raising the seed money necessary to launch their business, how to raise it, and the perfect time to fundraise.
Table of Contents
What Is Seed Funding?
A startup’s first round of funding is known as seed funding. Usually, it comes from angel investors, friends, family members, and the founders, in return for a stake in the company.
The main objective of startup fundraising is to launch the firm, involving the early stages of product development, comprehensive market research, and other operations.
Notably, seed funding carries a substantial risk because the startup is yet to establish itself in the marketplace. The amount of seed funding varies greatly depending on the startup’s needs, the sector, and other critical business factors.
How Does Seed Funding Work?
Since seed-stage investors evaluate most startups based on little sales data or business experience, they will consider the projected growth trajectory, past performance, management, market share, and risks.
As the startup receives seed money to develop its operations further, the investor receives a stake in the company.
The investors who participate in the business decision-making processes offer new managerial perspectives. This also gives the startup an edge over more established market competitors.
Advantages of Seed Funding
The primary benefit of startup fundraising is that the investors are prepared to accept the significant risk of failure associated with launching a business.
Absence of Debt
With seed funding, aspiring entrepreneurs are not burdened by previous debts or other commitments. Instead, they must provide a share of the company’s stock to the investors.
Seed money can assist a startup in gaining access to crucial networks and the resources to seize opportunities and expand faster. A startup may also benefit from seed funding to generate interest and momentum for its products or services.
Viability of Business Models
Startups might benefit from seed capital to test their business models and collect customer feedback. A startup with seed money can also recruit a group of experienced industry experts to assist in business expansion.
6 Crucial Steps to Raising Seed Funding
There is no one best technique to obtain seed investment for entrepreneurs. But regardless of how the founders go about it—whether they approach family members, incubators, angel investors, or venture capital firms—what counts is that they collect enough money to launch their product or service and make some headway in the market.
To understand how to raise seed funding, the startup must know who the most suitable investors are for the startup. The startup must also demonstrate why investing in their business will be lucrative.
Here are 6 steps a startup must follow to obtain a seed capital investment:
1. Business Plan
The first step is to put a solid business plan. This will assist in explaining to potential investors the startup’s vision and value proposition. The plan must include a market analysis, competitive analysis, business model, and financial projections.
Additionally, startups need to have a strong management team in place. Once founders have these crucial materials, they can start reaching out to investors for startup fundraising.
The first step is choosing the perfect time for fundraising. The founders must consider their willingness to partly give up company ownership in this step.
Next, founders must determine if they are in a good position to meet the investor’s requirements. The startup must also be able to show prospects for growth, the viability of products, service traction, and opportunities for expanding in the market.
3. Finance Type
The next step is to decide which kind of startup fundraising will fit the business plan the best. The founder must first clearly comprehend the startup’s operations and what is required to reach the next funding milestone.
For instance, the founder must determine the costs associated with acquiring and retaining new customers, paying employees, marketing, etc.
Venture capitalists (VC) companies are specifically oriented toward providing funding to companies. In particular, once the startup starts moving into later-stage fundraising, VC seed money is a common funding path. VCs invest in firm stakes or equity that could eventually result in a capital gain.
(a) Angel Investors
As a form of alternative investment, angel investors are people who put their own money into startup enterprises. This differs from seed VC in that VC firms make investments on behalf of other people. However, angel investors typically demand a higher equity stake in exchange for their investment.
(b) Accelerators & Incubators
These companies are based on the idea of helping startups through the establishment and growth of a business. They demand shares only in return for services provided, making it cost-effective for small companies to approach these investor types.
This requires creating a crowdfunding campaign. Campaigning is based on pre-selling products and persuading a sizable number of people (donors) to invest in the business before it is listed on the market.
4. Funding Amount
The type of business and investor expectations significantly impact the final fundraising amount. Generally, sufficient seed funding must be raised to meet the highly contextual requirements for raising series A.
The ability to reach the next funding milestone should be based on the overall amount of seed money. Realistically, the amount must be raised within 12 to 18 months.
Once founders have decided on the target investor type and the funding required, it’s time to start contacting investors. Startups need to identify and approach potential investors. This can be done through online research, personal networking, or professional service.
Remember that for investors to feel confident investing, they need to see evidence of potential performance. Although subjective judgments will be used to make investment decisions, tangible plans and forecasts are welcomed.
A pitch deck is a brief and informative presentation summarizing the company, the market opportunity, the management team, the business plan, and the financial projections.
It will be easier to customize the proposal for the intended audience (the investor, not the client) if the founders know who they will present it to. Keep the pitch brief and focused on the most crucial details (problem to solve, customers, solution, market size, traction, business model, and long-term forecast).
Once an investor expresses interest in making a real investment, the next is getting into the negotiation phase. Founders must evaluate the future value of the startup. However, the founder must be realistic about the investor’s nature, expectations for their stake, and the associated risks (business management insights, etc.
How Much Seed Fund to Raise?
It would be beneficial to create many plans that show different amounts of funding and how they can affect profitability and equity dilution.
Planned milestones are good indicators to remember when arranging each funding stage’s goal capital amount.
When setting the total amount, the founder must consider what progress the funds will lead to. Next, the founder must consider the dilution rate that will be necessary (selling stake to investors). During their seed stage, founders typically dilute between 10-20%.
Before choosing the kind of investor to fund the project, the founder must keep the above in mind. Given that various forms of financing have varied benefits and drawbacks (e.g., convertible debt, safe investments, and equity), it’s critical to have a comprehensive understanding of the types of investments that best support the company’s future success.
The amount to be raised should align with a solid and convincing business plan. Furthermore, the founder should ensure that the growth likely to be achieved is sustainable (more capital = quicker growth).
Current startup fundraising Scenario in India
Generating a certain amount of revenue is essential for gaining investors’ confidence.
The ideal scenario for businesses seeking seed capital in India is to have at least 1,000 clients and less than $2–$3 million in annual revenue. By doing so, the founder can equally invest capital in marketing, distribution, and inventory to reach more customers.
However, to pique the interest of possible investors, the founder must create at least a few hundred thousand dollars in income. If founders can show strong potential for growth and a strong business model, they will be more likely to succeed in raising a seed round.
Remember that the company’s stage will also affect how much money is needed. Raising money will be more complicated if the startup has no revenue.
The Right Time to Raise Seed Funding
Startup fundraising for seed-stage investment can begin as soon as the founders are prepared to share their narrative. Investors need persuasion; they don’t just want to see product features or hear about service offers; they also want to know about product-market fit and evidence that the product can expand.
Seed stage funding is intended to provide the capital foundation from which a startup can pursue its idea to demonstrate that a product/service will work. To show the product-market fit, a startup may need to reach several milestones, depending on its nature and the demands of investors.
Founders should ask for seed capital once they have defined their market opportunity and their target market.
Applicants for seed funding should have data to support the demand for the product, pre-sales numbers, and competitive advantage, because investors want to see evidence that their investments will provide a profit.
As the company is still developing, research-backed sales estimates are acceptable as long as the presented statistics accurately represent the product-market fit.
Seed Funding Rules to Be Followed
The following common errors can be avoided by being aware of the fundamental principles of fundraising:
- Failure to adhere to the seed funding rules and regulations
- Surrendering more than 25% of the company’s seed round equity, as there will be little equity left for future investment rounds.
- Taking on debt that the current cash flow can repay.
Knowing the company’s correct valuation, which defines the prospective ROI, is crucial. In addition, founders should consider how much control they want to retain over the business.
Other guidelines are as follows:
- Always be realistic with the total amount of funds to raise
- Have research and data to support funding requests
- Be open and honest about your present financial situation.
- Be sure to estimate the value of the business.
- Be prompt when concluding an arrangement with potential investors.
Startup India Seed Fund Scheme (SISFS)
SISFS is a government initiative that provides financial assistance to startups in India. The concept intends to offer startups financial support through seed money of up to Rs.10 crores.
Goals of Startup India Seed Fund Scheme (SISFS)
The Startup India Seed Fund Scheme aims to support businesses in performing market analysis and product development. This will help them draw in investors or secure financing from institutions such as commercial banks. A startup’s ability to get funding quickly during its early phases of development may make the difference between success and failure.
After presenting proof of concept, startups can only receive funding from venture capital firms and angel investors. Banks tend to lend monetary resources to applicants who are asset-backed. Providing companies with creative ideas allows them to run proof of concept testing and launch their business.
Initially, startups can seek Rs. 20 to 50 lakh seed funding. The money can be used for marketing, business development, and product development. The scheme also provides incubation support and mentorship to startups.
Eligibility of Startup India Seed Fund Scheme (SISFS)
Startups must meet the following criteria for seed funding under SISFS:
- Any startup founded less than two years ago at the time of submission is eligible to apply.
- The startup must be registered in India and have the Startup India Certificate, and be recognized by the Department of Industrial Policy and Promotion (DPIIT).
- It must have a minimal viable product or prototype in place, be working toward an innovative and scalable business strategy, and have the potential to scale up.
Documents Required for Startup India Seed Fund Scheme (SISFS)
An entrepreneur must present a few essential documents to obtain seed money from investors. These consist of a pitch deck, a business strategy, and financial forecasts.
- The vision, mission, and essential goals of the startup are described in the business plan.
- The startup should outline its sales and profitability goals in the economic projection.
- A summary of the startup, the market potential, the team, and the growth plan is included in the pitch deck.
The Amount a Startup Can Get through Startup India Seed Fund Scheme (SISFS)
- For the verification of Proof of Concept, prototype development, or product trials, up to Rs.20 lakhs may be required. The grant will be disbursed in installments based on milestones, and these milestones may relate to product development, testing, and building a product ready to go on the market.
- For market entry, commercialization, or scaling up using convertible debentures, debt, or other debt-linked instruments, investments of up to Rs.50 lakhs may be made.
- Startup applicants can receive seed support in either debt/convertible debentures or grants.
Startup India Seed Fund Scheme (SISFS): Seed Funding Regulations for Startups
- All applicants to the SISFS scheme must form an incubator seed management committee. This committee will choose and assess firms seeking seed money.
- The expert advisory group decides who will serve on the incubator seed management committee.
- Startups must submit information about their teams, a problem statement, and a summary of their products.
- Any of the three incubators an entrepreneur chooses may accept applications for seed money.
If the first application is rejected, the applicant may file a second one.
- All rejected applicants will receive an email notification about their rejection.
- Applicants can follow the status of their applications on the official SISFS webpage.
- The incubator will select the startup and provide seed funding.
Startups must pitch their concepts to the incubator’s seed management board. Based on this presentation, the incubator will narrow down the applicant pool.
- The incubator seed committee will assess applications based on presentations within 45 days of receiving the application to determine which startups are eligible.
Nowadays, there are many options for obtaining startup fundraising. Government subsidies, angel investors, and seed funding firms are available. But how can you finance your new company the most effectively?
The key takeaway is that seed funding (for example, seed-stage venture capital) should assist startups in reaching their next funding milestone. Therefore, it’s important to stay realistic about the total amount needed and consider the type of investors being pitched to. By doing this, founders can keep their company’s control while having a significant impact with less cash.
trica equity envisions making the private market agile, open, and scalable with equity management and transaction technology solutions. With a $3B portfolio value, $374M funds raised, and 7500 angel investors, trica is on its way to building the infrastructure and tooling required to make India’s private markets genuinely digital with an expanding startup ecosystem in the backdrop.
Are you an investor or a startup? Book a demo today and see how trica helps you manage equity like never before.