Startup companies have lots of costs; from chairs to screens to things that fill the pantry in the office daily. In their early days, startups need to make a great number of purchases in addition to paying rent and salaries.
On top of all this, startups need to grow rapidly in their early phases. This is why outside funding is crucial for an early stage startup’s continuity. You need money to do all of these things. Founders generally turn to “seed” capital for their initial funding. Below, I tried to explain some basic concepts about funding in the early days of a startup and listed a few pointers.
What is seed capital and why do startups need it?
Seed capital comes in two major forms: When your company is just getting started and you have little or no revenue, you are in the mode of taking in revenue by either selling your products or by signing up customers. Once your sales have ramped up, then you can generate some profit. Seed money is used in the earlier phases of your company’s growth, when your focus is simply on attracting customers. Investors or lenders see potential in your company and want to invest capital to help you get to the next stage of growth. They believe that the growth you’ve already achieved and your potential to grow can create a valuable return for their investment. What are the advantages of raising seed capital?
How much is enough?
Startup entrepreneurs and investors are often asked how much seed capital is necessary to get their business off the ground. The answer to that question is “it depends.” The appropriate amount of seed capital for a startup depends on the type of company the entrepreneur is building, the start-up’s business plan, and the startup’s runway strategy (the number of months that it needs to launch to generate sufficient cash flow from operations, after deducting a minimum amount for working capital.) There are lists online that summarizes the amounts that various angel investors and venture capital firms typically look for in an entrepreneur’s business plan when they make investments in companies.
What are the sources of seed capital?
There are three main sources that seed capital can be raised from. Startups looking to get their first round of funding typically need to get it from multiple sources. They can choose to solicit investments from family and friends. They can also solicit a very large pool of investors through a seed round. The advantage of these routes is that most investors see a return on investment quickly, as they are being approached early and frequently. Seed rounds are typically more costly to raise and will require a business plan, business model and company valuation (if applicable). Large venture capitalists Startups looking for additional capital will typically get it from investors who have experience working in the startup industry.
How to find capital
Finding seed capital is pretty easy. That is if you already have something to sell, provide a service, or you already have customers. Many startup companies now operate as intermediaries, creating a service or product to supply this new product to customers. This is what entrepreneurs call a “pre-revenue company”. The challenges of finding early stage capital come in two parts. First, you have to have a great product or service to supply. Second, you need an investor who believes in the viability of your business. Many early stage investors would love to see the world of entrepreneurship succeed, but many don’t have the cash to buy in. If you are looking for startup capital, there are checklists on the web that will help you sort the wheat from the chaff.
Approximately 30% of the firms that receive an investment raise the seed funds from friends, family members, business partners, and angel investors. The remainder raise the money from angel investors and venture capitalists. Both options are available. Once a startup has an idea and has attracted an angel or venture capitalist, the founders then determine how much seed money they need. They go through the same process as any other startup raising money. One strategy that founders should utilize, especially early on, is to cut a deal with an angel investor. One advantage of this approach is that the initial investment can cover all startup costs. Another approach is to seek venture capital. This option makes it possible to share equity in the company.
Raising capital is one of the most difficult tasks for any startup company to do. Even the most well-laid plans can quickly go awry when the funding suddenly disappears or a competitor has a new big idea. A little preparation can go a long way in helping a startup raise the capital it needs to get started. Startup companies that grow fast should be concerned about this common funding challenge. The most successful companies, however, tend to be those that have a clear plan for what they are doing, know how to build a team, manage cash flow, and manage long-term growth. A little preparation can go a long way in helping a startup raise the capital it needs to get started.