Seed funding or seed capital as the name suggests is the initial funding in any start-up.
Seed refers to the very early stage of the business. At this stage, the business is either merely a product idea or is in the process of market acceptance or company formation.
This type of capital-raising activity is carried out in only the initial stages of business as the highest level of risks is involved.
Under seed capital or seed financing, money is raised from family, friends, acquaintances or Angle investors. Venture capitalists usually do not invest in such companies, however, if the potential growth or market scalability is high, they may invest at a higher stake in the company.
Seed capital is raised in exchange for a certain percentage of equity in the company. Although compared to other sources of funding equity funding or such as venture capital, raising seed funds is a less formal approach.
What is Angel Investment?
An angel investor is a wealthy person or a company investing in a startup in exchange for ownership or a percentage of equity or convertible debt. It may be a one-time investment or perpetual capital funding.
What is Venture Capital (VC)?
Venture capitalists are individuals or companies that contribute a major chunk of funding required to start or scale up a business. They fund activities like product or market research, setting up a production line, buying office space, purchasing assets, etc.
Benefits of Seed funding –
- It shares the financial burden of setting up a business.
- In case a business owner has insufficient funds, this is a low-liability option available.
- If any bank refuses to grant a loan due to a lack of collateral. If the banks do not trust the person to repay the loan capital can be easily raised through this method.
- This method gives the business owner working capital before even a single product is created or launched in the market and profits are generated.
- It can be a long-term investment in the company, which gives the entrepreneur substantial time to set up the business and generate revenue and profits.
A study reports that as of July 2022, due to various schemes launched by the Government for startups, India has 105 unicorns with a total valuation of nearly $340 billion.
What is the process of raising the funds?
Any business starts with a product or service idea.
The business owner looking to start a business translates this idea into a prototype or creates a blueprint. This idea is pitched to the investors. The initial investors can be family, friends, acquaintances, Government agencies, banks or investors.
The sales pitch should consist of the product or service details like the features, benefits, advantages, target market, buyer persona, competitors, market potential, financial projections, and market scalability plan. This is known as pre-seed funding.
The investor invests in the idea for a certain percentage of the equity or stake in the company. It can be for a short-term or long-term activity.
There may be multiple series or rounds of fundraising activity, typically known as Series A, Series B, Series C, and so on. After the initial stage of seed funding, the subsequent series of funding is done at various stages of the company’s life cycle.
For example, in Series A, the company aims at creating brand awareness and incentivizing the customer to choose their product over the competitors and build a loyal customer base. This requires heavy spending on marketing activities.
In Series B, the companies are expected to have crossed the initial stage of awareness and are tending towards the growth stage. This is where the demand for the product is rising and to keep up with the demand, the production has to scale up. Hence in this round of funding the companies aim to generate capital for expanding the production capacity.
In Series C, the company is in the growth and diversification stage to expand its revenue streams and explore different markets.
The reasons to raise capital may differ for different companies, however, the aim is to scale up their operations and increase their profitability.
To understand the different types of capital-raising activities, one needs to have a deep knowledge of finance and accounting.
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