According to recent surveys and studies, near about 94% of the businesses fail during the first year of their coming into existence, lack of funds is the most common reason as money is the bloodline of every business. Funds are required to grab the opportunities existing in the market. Though you can resort to bootstrapping initially, yet you’ll require additional funds to sustain in the long run.
This is the right time to launch a start-up in India as the government policies and economic environment is favouring the innovative and creative ideas.
However, it is pertinent to decide the future course of action and plan out a strategy so that your start-up does not end be one of those in the 94% and face closure within the first year itself.
As funding is considered to be the bloodline of any new business, especially the start-ups, they raise funds at different stages such as pre-seed, seed and series (A, B and C funding rounds). This is dependent on the level of progress of the start-up in developing its products and services.
Pre-seed and seed funding rounds generally come in the initial stages when the start-ups usually require lesser funds. Besides family and friends, seed funding is provided by investors of companies who wish to invest in the start-ups. Now, even the government is taking an active part in seed funding.
What is Seed Funding?
Seed funding or seed capital is generally the money invested in a company in the initial phases when it is very young. In seed funding, investors invest money in a start-up company in exchange for an equity stake in the company. This early investment is generally meant to support the business in early years till it is able to generate funds for itself.
Seed money can be obtained from various sources like friends, family, angel funding and crowdfunding. It also includes the start-up’s founders own money as well which is referred to as bootstrapping.
Seed funding is a very important stage of a start-up’s life as it determines future success. This is the first step and involves very early investment rounds wherein it provides help to grow and generate its own capital. In this funding round, the fund providers earn equity stakes in the company in return of the capital invested.
Things to Know About Seed Funding for Startups?
- The biggest challenge is to convince the investors to put their money in the start-up when there is no concrete product or transaction to win their trust.
- Founders need to do extensive market research gain information regarding product and service development, existing and upcoming competition, needs and preferences of the consumers in the relevant market.
- It is very tough to lift up the business from the ground level when there is a capital crunch and until the business starts earning funds of its own. Seed funding takes care of the marketing, infrastructure, development and initial hiring costs.
Another important aspect of seed funding is the time of raising funds as this has a substantial impact on outcome and long-term goals. It is better to have a well-planned business strategy in hand prepared after extensive market research and a roadmap for product development to earn revenue, to convince the potential investors.
There is no prescribed way neither any specified sum of money to be raised during this round of fundraising.
However, it is advisable to raise such amount of funds that are able to ensure the sustainability of the start-up till the next round of fundraising. Ideally, the founder should raise as many funds as are required to take the business to the profitability stage.
The factors which influence the amount of seed money that can be raised are current & future plans of the business, size of operations, duration of fund requirements and credibility with investors. Some investors lay emphasis on current market conditions as well.
How To Choose The Right Investor?
If the start-up falls in the hands of a wrong type of investor who has mala fide intentions, it will lead to a downfall of the business. For a start-up, every investment is essential but seed funding is the most crucial of them all as it impacts the entire life cycle of the business.
However, to choose the right investor out of all the potential investors, the founder needs to evaluate his business accurately i.e., neither undervaluation nor overvaluation. Moreover, the founder should calculate the number of funds which are sufficient to run the business smoothly and then make a research on the available investors. It is best to choose such an investor who can provide adequate funds in this round and can assist in future rounds as well.
In short, market study and start-up valuation are the deciding factors in the seed funding stage. Financial planning is equally important as other business development planning because money is the bloodline of every business.