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Seed funding for startups is the first amount of money that is needed to begin your business operations before later stages of raising capital called series A, B and C are sought. Seed funding gives you cash that you can use before your business starts producing a profit. Seed funding can come from personal savings, friends and family and sometimes from wealthy individuals who are prepared to take a risk by investing in a company that has yet to prove it can make a profit or that the profit it will make will generate a sufficient return on their investment.
Key Points
- Seed funding is some of the first money your company can raise.
- There are many sources of seed funding, which usually involve selling equity in your business.
- Seed money can be a great way to start your company but be careful not to sell too much of your stake in your business.
What is Seed Funding and Why is it Important for Startups?
Seed funding refers to some of the first money a startup raises by selling equity in the business. The term seed refers to the fact that the funding comes very early on, in hopes that the seed will sprout and grow into a successful business.
Seed funding differs from angel investing in that seed money is typically raised at very early stages, and usually based on the idea or proof of concept of the company’s founder. Angel investing comes a bit later when a company is just about to launch or has very recently launched.
Seed funding is important for startups because it gives them the initial money (startup capital) that they need to get off the ground, purchasing supplies and equipment, and providing any employees with pay to help the company get up and running before it starts making sales.
If you're interested specifically in finding extra cash for an equipment purchase, our article about equipment financing for startups could come in handy.
How to know if your startup is ready to get seed funding
Ask yourself these questions to help decide if you’re ready for seed funding for your business.
Do I have a minimum viable product?
A minimum viable product (MVP) is the most basic version of a product that you plan to sell. It shows the base of your idea that you hope to refine based on customer feedback and market research. Having an MVP gives you something to show to investors.
Do I need money to build a prototype?
If you don’t have a prototype of MVP yet, you might turn to seed funding to raise the money you need to start building examples of your product that you can iterate on.
Is it time to hire essential staff?
If you’re ready to start hiring experts that will be essential to your company’s success, you can consider seed funding to provide money you can use to pay the people who will help you grow your company.
Can I demonstrate the market for my product?
If you’ve done market research and can show demand for your company’s product, or even have a few paying customers, that can show seed investors the viability of your company and make it easier to raise money.
How do you raise seed funding?
There are many ways for business owners to raise seed funding. Though each source of funding differs slightly, the process will be similar. You can think of raising seed money as very similar to marketing.
- Build an investor “funnel”: Find a way to attract qualified investors to your company and build a funnel that they can pass through, learning about your business and its plans.
- Build relationships: As potential investors pass through your funnel, build relationships with them and help them learn about you and your goals for the company. These relationships can help convince investors to offer funding.
- Nurture relationships and keep communicating: Once you’ve built relationships with potential investors, keep nurturing those relationships. Even once they’ve offered funding, keep communication lines operating so your investors know what’s going on. Their word of mouth advertising may even help attract more investors.
List of sources for seed funding
If you’re considering seed funding for your startup, here are some of the most popular sources of seed funding.
Seed fund yourself
Seed funding your own business is one option if you have the assets necessary to do so. The benefit of this strategy is that you don’t have to sell any equity in your company. However, the drawback is that you’re taking on 100% of the risk of the company failing.
Common sources of funding in this scenario include savings, personal loans, a loan against your home or other property you own, or investments and other assets.
Crowdfunding
Crowdfunding involves raising small amounts of money from a large number of people. In many cases, crowdfunding takes the form of pre-sales of products that you plan to build and deliver using the money raised. You can also participate in equity crowdfunding, selling a portion of your company to individuals who want to help it grow.
SBIR/STTR funding
Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) are government programs that help American businesses engaged in research and development and grow their company.
These programs are highly competitive and offer grants to high-tech, innovative startups that can help meet federal research needs. There are two phases of awards:
- Phase I: Up to $250,000 for 1 year. Determines the quality of performance, technical merit, feasibility, and commercial potential of a product.
- Phase II: Up to $750,000 for 2 years. Based on results achieved in phase I and the continuing technical and commercial merit of the product.
- Phase III: This phase does not come with funding but includes commercialization of the product, including the potential for federal contracts for R&D or production.
Incubators
Startup incubators give business owners training and mentoring that they can use to build a company from the ground up. Typically, any entrepreneur can join an incubator and gain access to its facilities and tools.
At an incubator, you can network with other business owners to get help with your own company and meet potential seed investors.
Accelerators
Startup accelerators, like incubators, offer mentorship and training to entrepreneurs looking to start a new company. However, they are more selective. You typically have to apply and show the potential of your business or product to have a chance of getting in.
As the name implies, if you get into a startup accelerator, the idea is that it will be an intense experience that accelerates your company’s growth beyond what you could do on your own. As part of the process, you typically receive funds in exchange for a percentage of your company’s equity.
