Among the biggest factors that determine the survival of a startup is how to fund it. No matter where you intend to get funding from, the earlier you decide on a strategy, the better. Funding done at this initial stage of a business is called seed funding whilst the capital is known as seed capital. We'll tell you how to get seed funding.
Just as a seed needs unconditional care and water to grow, a startup business needs crucial nourishing of finance to expand and grow. So how exactly do you get seed funding? In this article, we’ll find out the processes involved and how to set up your business for consideration during your first elevator pitch deck.
First, you have to make sure investors take you seriously.
Investors want to see a sturdy team dynamic. Any moment they sense you have a weak team your idea is already facing the risk of rejection. Investing in a startup is no joke and the risk applies to both the investor and founder. It is therefore important to show your team strength to give investors a guarantee that your venture will be a success.
So you have joined the team of thousands of startups willing to risk it all just to see their idea flourish into a seven-figure company. What separates you from the rest? This is a question you’ll have to endure once you start pitching investors.
To find the right answer, first ask yourself, “What kind of problem is my startup solving?” Once you get to know why your startup exists, you can be sure to pique interest. Investors are often interested in the core structure of your startup and only want to know the current functions of your products/services.
Once you’re set up to convince investors of the potential success of your startup, it’s now time to start procuring funds. Remember, these funds are not handouts and each contributor will expect their money back with additional interest or share of your company.
Check out a video we made on how to raise money for startups:
Although not considered as a loan, bootstrapping is a popular way to get your startup off the ground. You can bootstrap your way for as long as you want, but always remember to separate personal finances from corporate ones. From an investor’s standpoint, it is important to separate liabilities to be protected against possible complications.
Besides bootstrapping, friends and family rounds are the most frequent sources of initial funding. Consider this option hassle-free, and less complicated in terms of documentation. Furthermore, your friends and family already know you so there’s at least a basic level of trust.
Always remember to document your agreements and be upfront about the potential risks of the startup. We also recommend you to find members who can afford to lose their money, in case of a downfall.
Huge investments are usually made by large corporations, angels, accelerators, incubators, and VCs. At this point, you need to incorporate your startup and focus solely on raising funds. Accelerators and incubators may ask for equity in exchange for funding.
Angel investors too will ask for equity from a company in exchange for services (including funding). However, angels are more flexible and often willing to take more risks than venture capitalists. As a rule of thumb, you should not give more than 25% equity- giving investors significant ownership may later jeopardize your company’s vision.
When asking for funds, you’ll have to decide on which funding option to go with: convertible debt or an equity bond.
If your seed funding is less than $1M, you can consider asking for convertible debt. When you raise equity, the debt automatically converts (15-20%). Convertible debts are quick and require less documentation, making them popular options. Also, convertible debts rarely require a valuation, although you’ll pay the debt with an interest of 4-6%.
When you raise the required capital to $2M, we recommend a Series Seed Preferred Equity. Yes, they’ll need a few documentations and agreements, but they are worth it: contracts and agreements based on this type of funding often protect both the founder and investor from misusing the startup. For instance, investors have no registration rights, co-sale rights, and no preferential dividend rights.
Getting funded is not easy at all and the process may take a couple of months to close a round of seed funding. It’s crucial to get your startup strategically positioned before handing in your first pitch deck. Do proper background research on your investors and pin down the best match for your new venture. Remember, seed funding is more than a numbers game and you need to plan your strategy thoroughly.