There are various options available to entrepreneurs when it comes to funding, ranging from grants to crowdfunding. Another option is seed money. But what does this term mean? Where can entrepreneurs seek out this kind of funding? And what should entrepreneurs know about the current seed capital landscape?
What is seed money?
Also referred to as seed capital, seed money is used to fund a new enterprise during its launch stage. The “seed” part of its name comes from the notion that in order for a small business to grow, a seed (aka early stage financing) must first be planted.
Statistics have shown that 29 percent of startups fail due to running out of cash or that businesses struggle significantly if they do not have enough capital early on, which makes seed money critical to getting a new company up and running.
When entrepreneurs find an individual or a firm that is willing to provide them with their desired sum of seed money, they must provide the investor with an equity stake in return. Even if you think your business has a unique set of offerings or services to provide the market, investing in a startup is still considered to be a risk. In exchange for providing seed money, investors typically receive partial ownership or shares of the business in return.
Some entrepreneurs may be okay with this kind of partnership, happy to work alongside an experienced investor who is aligned with the startup’s mission and values. Others may not be comfortable with the idea that they are no longer 100 percent in control of the business. Before you even begin to look for a potential seed money investor, it’s important to ask yourself if you’re okay with distributing the business to outside management. If not, you may want to consider going back to the drawing board for funding options.
Related: Finding Funding When You’re a Hardware Startup
Where can I find seed money?
Good question! From individuals to firms, here’s a look at a few places where seed capital may be provided for your startup.
- Close family and friends. I emphasize the word “close” because you should only approach the people in your life that know you the best with a topic as sensitive as financial investments. There’s less risk (knock on wood) that these individuals would charge you interest for their investment than a bank would if you applied for a business loan. Above all, they want to support you and help bring your dreams to reality. As such, you should treat them as you would investors. Bring along your business plan to examine and allow them to ask questions. Be professional and understand that while entrepreneurship itself is a risk, there is also an even greater risk in ruining relationships of those closest to you.
- Seed venture capital firms. Think of companies like Homebrew, LOWERCASE capital, First Round Capital, and Founder Collective, among countless others. Competition for funding with these firms is extremely difficult to break into, especially famous ones like 500 Startups and Andreessen Horowitz. If you do manage to attract their attention (and pocketbooks), you must be prepared to deliver a significantly larger equity stake than a single individual would require. Polish your pitches, revise your business plan and consult a legal professional for advice before you begin reaching out to the appropriate firms within your given field.
- Angel investors. Doctors, lawyers and existing entrepreneurs may act as angel investors on the behalf of a startup, investing a portion of their existing wealth into your company. This particular type of investor is one of the few that is on board with a risky business and can provide additional benefits as an investor, such as mentorship. Unlike a firm though, angel investors will not be able to provide your business with millions of dollars — and that’s okay if you’re carefully calculating the early range money your startup needs.
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What does the state of seed funding in 2018 look like?
Thanks to a low cost of entry and plenty of available resources, it has never been easier for entrepreneurs to start a business in 2018. How does this translate to funding? While seed capital is gradually becoming more available to all genders, ethnicities and industries (and in higher valuations than ever before) entrepreneurs must be careful not to fall in love with the dollar signs.
Before seeking seed capital, you should objectively understand the valuation of your startup. Naturally, many entrepreneurs believe their ideas are good as gold, but it’s important to establish a business plan that evaluates the feasibility of the company as written three to five years out in the future. Not only is this attractive to investors (seed money-based ones or otherwise), but it keeps entrepreneurs from raising too much money that cannot produce a sound return on investment.
What’s the recommended amount for seed stage companies to raise? Set yourself up for an 18 month timeline complete with anticipated milestones to reach and enough of a financial net to catch you if you should fall.
Of Interest: Should You Incorporate Your Business as an LLC for Tax Breaks?
