If you’re looking to start a business, the first concern is always capital. Without enough money, it is hard to get your ideas off the ground, and your business is at significant risk for failure. But not all hope is lost, as there are plenty of people hoping to invest in the right company.
Of course, getting funding is not as easy as it might sound, and it can take time. However, most startup businesses must walk this path, so it’s best to get started.
In this article, we’ll talk about what seed money and seed funding are all about and how they can benefit entrepreneurs. We’ll also discuss different kinds of seed funders and what your business needs to appeal to these investors. And we’ll help you determine when your business is ready to move to the seed-funding stage.
Seed Funding Elements
Starting a company is a risky business. So, why do so many entrepreneurs take the chance anyway, and how do they do it? Well, of course, you’ll need specific business skills, a good idea, and tough skin. But these factors may not be enough. That’s why you should consider seed funding.
To understand seed funding, you need to understand the specific terms and role players that go with seed funding.
A seed round is typically the first financial round that’s needed to start a business. These funds aren’t enough to get the company on its feet but allow a business to get to a demonstrative stage. In some cases, a seed round can also include enough capital to complete a business plan.
Your seed rounds can come from many places. Depending on the amount you need, it can come from your personal assets or friends and family. In most cases, you’ll need more than one capital investor, so getting an angel investor is often the best way to get your business ready for the presentation phase.
Seed money or seed funding is a private investment of capital. This is different from Venture Capital funding in a couple of different ways.
The first difference comes with the amount of capital that each investment entitles. Seed investments usually start at about $10,000 and are less than $1 million. Venture Capital investments begin at about $1 million and can go up to about $30 million. Simply put, the amount of capital from seed funders is less and aims to support a business while it is still finding its feet financially.
Unlike Venture Capital investments that come from institutions, seed funding often comes from individual investors. It can include crowdfunding, angel investors, or friends and family.
Starting a new business involves financial risk for entrepreneurs. That’s where seed funding comes in, as it can support a company in the growing phase, where entrepreneurs aren’t making revenues.
Seed funding can cover the costs of marketing, infrastructure, initial hiring, and any needed developments while the business is growing. It also comes in handy when new partners join the company and also reduces the risk for failure.
When it comes to investors, there are different paths you can follow. It is up to you to choose your direction, but remember there’s no guarantee that any of these will work on the first try. So you’ll need to do research to determine which types of funding are available and best for your startup.
Today, there are over 500 crowdfunding platforms available. Anyone with an innovative business idea can present it on these platforms, which allows you to share your vision with a large group of people. If individuals like your idea, they can make donations so you can start your business.
Incubators are non-profit entities run by either the public or the private sector. They generally don’t take equity from the businesses they invest with. These programs offer small seed investments and other helplines, like infrastructure or training.
Although accelerators offer small seed capital investments, they also focus on providing founders with networking opportunities, mentoring, professional services, and workspace. Unlike incubators, they are primarily privately funded and expect equity from the startup they are supporting.
Angel investors are typically individuals that seek opportunities by investing in early startups in exchange for convertible debt and equities. These investor’s funds are vital to get a new business off the ground.
Angel investors aren’t easily convinced, so you need a well-formulated business plan before approaching them. Angel investors have plenty of cash and tons of experience, so they’ll judge your idea based on what they have learned from the industry.
It may seem intimidating to present your business model to angel investors, as they only accept around 25% of the proposals they see. Still, you’ll have a greater chance of running a successful business if your idea is good enough to convince them.
One advantage of having an angel investor is that these individuals will stop at nothing to have your business thrive. In the end, they will benefit from higher equities once your business is generating self-sustaining revenues.
What Investors Are Looking For
Before you start approaching potential investors, you’ll need to showcase your business idea. There are some key ideas you need to prepare before your business is ready.
Remember, you aim to convince an investor that your startup will be profitable in the future. You’ll need to do research, prove theories, and answer difficult questions.
Passion and a good product alone won’t get you there. Here are some of the most important factors to consider when putting together your pitch:
About Your Business Profile
Start with the company’s name and vision. Show that you have a good target market and understand how your service or product will benefit the set target groups.
Also, present investors with your team and show previous work, success, and fundraising ideas. Emphasize highlights and also showcase your ability to deal with problems.
It is good to remember that although it may be your first pitch, the investor has seen more than a couple. Ensure that you’re not just reading information to them, that you’re making eye contact and engaging with them. Show them you believe in your startup, and keep them interested to the end.
We also suggest keeping your message brief. Try to stay on topic, and if you’re worried about losing track, tell investors you’ll answer questions after your pitch. The presentation should aim to highlight what’s essential and showcase your business skills.
You’re Selling an Idea, Not a Product
Of course investors are interested in your product, but what they came to hear is if there’s a market for it or not. Keep to the facts and provide statistics that prove that your business is sustainable. Emphasize market gaps and customer problems and show how your company aims to answer these demands.
Get to the Point
Within the first few minutes, investors should have a clear idea of what you are showcasing. Start with what your company is about and make your expectations from investors clear. Thell them what trade-offs are available and make sure you make it worth their time (and money).
Have a Strong Conclusion
The introduction and conclusion are what most investors will remember. Make sure you end with something that investors will remember.
Keep in mind that most investors have already decided on investing or not towards the end of a presentation. So you can view the conclusion as a final chance to convince investors of your worth.
A great conclusion includes a call to action phrase, followed up by a striking sign-off.
At the end of your presentation, be ready to answer tough questions. Investors are experts in the business field, and they’ll quickly spot mistakes or gaps in your business plan. If they highlight something that you haven’t thought of, see it as encouragement and not criticism.
When Should You Start Looking For Seed Investors?
You can start looking for seed investors at any point in time, but it is better to show up prepared because the market is demanding. Involving investors comes with risks, so even if the investor buys into your idea, you’re still at risk of failure. Therefore, it is best to have some prerequisites that ensure your startup is ready for the seed investor stage.
Here are some factors to consider:
Do you have the right team members to excel in your business, and are they reliable? You want to work with people who understand your startup’s vision and don’t want to replace critical roleplayers regularly.
Ensure that your workers and partners are in it for the long run and that the strength of your team can be well translated when preparing to involve angel investors.
Is Your Business Network-Friendly?
It is essential to have networking systems in place. Business is all about trial and error, and you can avoid many mistakes if you are open to taking advice and learning from other companies.
If you can showcase your ability to work with others and ask for advice, investors will acknowledge your business’s credibility.
If you want to sell a product or software, it is vital to have a working prototype. Investors would feel more secure about investing in something that they can see or experience firsthand instead of something that they can only imagine.
Seek Investors That Fit Your Niche
Before inviting investors to view your presentation, find out what they have already invested in and if these companies are successful. Research the potential investors to find out who they are and what they are looking for in a company. You must build a relationship with your investors, so you need to make sure that they are suitable for your business.
Have a Good Story
Investors want to invest in startups that move them. So, it would be best if you had a good story to tell. Nevertheless, authenticity is critical, as investors can quickly spot a dishonest presentation.
Test Your Product
Your product’s or service’s sellability is the biggest concern for most investors. It would help if you showed demand for your product, and then customers return to your company after their first purchase. Also, look at your competition and know how your product differs. Investors value thorough research and problem-solving abilities.
When it comes to starting a business, there are plenty of factors to consider when looking for funding. Seed funding is one of the best ways to get a startup on the right track. It provides entrepreneurs with a strong foundation and lessens the stress around employee salaries, workspace, and unexpected hurdles in the development stage.