Every budding entrepreneur needs funding to effectively launch their business and establish a name for themselves in their industry. There are many ways in which entrepreneurs may secure the finance they need to move forward, but in this stage, it’s common to hear people talk about ‘seed funding’.
Seed funding enables early-stage businesses to get the money they need to meet their goals and cover start-up costs through investment. From here, they should build the foundation for the ongoing progression of their company, allowing them to grow and generate revenue.
In this guide, we explain in more detail what seed funding is and its role in the financial journey of a new business.
- What is seed funding?
- What are the sources of seed funding?
- How much can you raise through seed funding?
- What do I need to secure seed funds?
- What happens next?
What is seed funding?
As the name suggests, seed funding is early-stage funding that helps businesses grow. When a venture is applying for seed funding, they are likely to seek funding for staffing, supplies and perhaps rent. The money they hope to raise will cover these expenses and improve cash flow.
Some companies may have already been funded by the owners personal savings or through investments or loans from family and friends, referred to as ‘pre-seed funding’. Seed funding is the first ‘official’ funding round.
Seed funding aims to finance those critical first steps every business must take. This can include the acquisition of resources (as mentioned above), early marketing, product development (including creating an MVP), setting up operational processes, establishing contracts and so on. A business can then build solid foundations for the ‘tree’ it will hopefully become.
What are the sources of seed funding?
Seed funding typically comes from an investment source. This may include private equity, venture capital, incubator programmes or even friends and family of the business founders. Most commonly, it will come from angel investors.
Angels tend to be more open to risk to businesses, including start-ups with limited experience or no proven track record, but might high potentials, making them a perfect seed funding fit.
Any investor you work with will expect an equity stake in the new company in exchange for their investment. With this, they will receive a share of your company value on exit and dividends once you start generating profits, so you must offer high potential as a business. They may also receive specific entitlements in your company, such as influencing any significant decisions.
How much can you raise through seed funding?
Every seed funding round will be different, and the amount raised will largely depend on the business seeking funding and the investors involved. Generally speaking, the sums raised can be anywhere between £10,000 and £2 million.
A seed funding round may raise enough to launch their business, meaning they need subsequent funding rounds for further growth. However, if you receive a smaller amount in the seed round, you can raise more funding in other rounds. We will discuss this in more detail later.
What do I need to secure seed funds?
If you are looking to raise seed funds for your start-up, there are a few things you will need to improve your chances.
Firstly, you need an effective plan and pitch deck that explains your business and the goals you are looking to fulfil. This must highlight your company’s potential and your ability to generate a profit, so the investors you approach are confident they will receive favourable returns on their investment.
Next, you must understand what investors to approach. This means knowing what you are looking for from seed funding (including the amount you hope to raise and how much equity you are willing to hand over). It’s also worth identifying investors in your industry as they may be able to provide hands-on guidance through their expertise that can shape your operations. You may consider investors that have worked with similar businesses too.
Once you’ve uncovered the kind of investors you want to work with, you need to find the right way to approach them. If you have mutual contacts, ask them to introduce you to kickstart the conversation. Alternatively, you could attend networking events to connect with potential financiers. Many online platforms are now designed to pair businesses up with investors for seed funding (such as Seedrs and SeedInvest), which are worth considering.
When you have created the appropriate connections and found interested investors, you will need to attend pitch meetings to represent your business positively and convince them you are worth funding. You will also need to overcome due diligence, which means meeting the investor’s criteria, providing honest answers about your business and making sure you only make legitimate claims.
What happens next?
If you successfully raise seed funding, you should hopefully be on route to establishing your business for growth.
It may be the case that you require further funding to increase your starting finances and achieve your growth ambitions. In this case, you can advance to other funding rounds (known as series A, B and C funding). This gives you the opportunity to raise finance as your company growth starts to accelerate.
Some companies will just go to series A, while others continue to B and C. It depends on how much you raise in each round and how much you want to secure in total. Each series works similarly to seed funding, though you must be prepared to offer further equity in your company in exchange for the increased investment, although your valuation should start to increase as well.
There is also always the option to complement seed investment with other sources of funding during the course of your business if you are revenue generating, such as commercial loans.
Conclusion
Seed funding is a great way to obtain the money needed for early-stage businesses to cover their start-up expenses and progress.
With many seed businesses then establishing themselves in the market, achieving growth, and generating profit, it’s also an excellent way for investors to get a return on investment while enabling more new enterprises to launch and survive.
By understanding the role that seed funding could play, you can also kickstart your funding journey while keeping access to further funding rounds down the line. This will promote the longevity of your company, enabling you to continue to raise finance to meet your objectives.
If you are considering raising seed funding for your start-up, we can help you find appropriate sources to kickstart your journey.