A startup seed germinates when a breakthrough innovation that solves a problem is discovered, but it requires funding to gain traction. According to studies, this is the reason why over 90% of Indian startups fail in early inception. One of the most important components that businesses must fulfil in order to lower their chances of failure is effective seed funding.
This comprehensive Guide to Seed Fundraising developed by experts at coffeemug is designed to help you get an overview of the funding landscape and actions the founders can take in order to raise funds during the seed stage.
To begin with, let us first understand seed funding.
What Is Seed Funding?
The initial financing for a business is known as seed funding. As the name suggests, it’s the first official funding that will assist a startup in getting off the ground and into the phase where startup ideas become a reality. In exchange for the capital invested, business owners typically have to give away a portion of the equity to investors.
Why do startups require seed funds?
Startups may be able to successfully bootstrap their projects, but they will require more funding to stay afloat. It will not be enough to rely on self-funding or cash donated by family and friends. Especially, in the case of tech startups where the growth is exponential in the initial phases, raising money from external sources is the most viable option.
When should startups raise seed funds?
When a startup realizes a visible market opportunity and has a client base that has embraced its product or service, founders should start thinking of raising seed funds. Investors are often willing to finance only those ventures whose founders have a clear vision and have developed a compelling product or service that has the potential to scale rapidly.
How much seed capital should be raised?
As a founder, you should begin estimating the fund amount required at the seed stage by calculating your financial projections and incorporating the desired milestones within a particular timeframe.
Startups should take into account the overhead costs and capital required to buy assets and then project a fund amount needed, while also keeping in mind the fact that the higher the funds projected the more %of the equity you lose to the investors.
Now that we have understood through this Seed Funding Guide the why’s and the whens’s, let’s move on to how seed funding works? And which funding options to consider.
How does Seed funding work for Investors and Startups?
When an investor invests in a startup, he expects a huge return on investment (ROI).
There are a few ways how seed funding works:
- Equity Funding: The seed investor provides you funds in return for ownership in your firm, often between 20% and 25%. Here, the investor’s primary motivation is to retain shares while the firm grows and then sell them for a great profit afterward.
- Convertible Debt: This type of funding is frequently used when valuing a startup is challenging. The investor grants you a loan with a principal amount, interest rate, and maturity date specified.
- SAFE (Simple Agreement for Future Equity): This form of fund is similar to convertible debt, except it does not have an interest rate or a set maturity date. A SAFE is simply a loan in exchange for the right to buy shares at a reduced price at a later date.
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Steps to achieve seed funding:
1. Focus on your funding options
As discussed earlier, even if you generate funds through bootstrapping or either from your closest social circles, this amount will not be sufficient to achieve desired success. Hence the next best approach is either Venture Capitalists, angel investors, or crowdsourcing. Angel investors and venture capitalists are more likely to fund higher amounts of money.
Angel investors are wealthy individuals who fund startups, which they believe can fetch greater returns on investments, whereas venture capitalists invest other people’s money in startups that have the potential to scale. Crowdfunding, on the other hand, is when you use an open platform to publicly propose your concept and receive donations.
2. Keep your documents ready
For a seed round, all you need is an executive summary and a slide presentation to lead investors through. You can leave behind a set of these documents for VCs to exhibit to other partners.
The executive summary should be one or two pages in length and should include the following information: Vision, Product, Team (location, contact information), Traction, Market size, and minimal financials (revenue, if any, and fundraising prior and current).
3. Meet your investors
Assuming you’ve done your homework on your investors, you’ll want to tailor your presentation to their preferences. If they’re VCs, emphasize your long-term prospects. Whereas for angel investors you can demonstrate how investing early will result in higher returns.
You’ll need to come up with a technique to make your statistics and proposal more concrete. Use a fundraising checklist and craft a proper story for your fundraising pitch deck.
4. Negotiate and close the deal
Although it’s tempting to accept the first offer you receive as you don’t want to waste your or your investors’ time. However, it’s worth negotiating on things like equity compensation wherever you can.
If some investors have put forth certain conditions or requests, get them verified by other experts. Visit Coffeemug and get connected with industry leaders who can guide you on which terms and conditions are feasible and which to avoid.
As soon as you receive a “yes” from investors, without wasting any time, get all the agreement papers signed from them, get the cash, and close the deal.
Seed financing may be a terrifying and exhausting journey for many entrepreneurs. Especially during the initial phases, founders struggle with several aspects like document preparation, finding the right investors, and so on. Focus on your pitch and presentations and you may be able to seal the deal sooner!
We hope this Guide to Seed Fundraising has provided you with valuable insights.
How can CoffeeMug.ai contribute to your startup funding journey?
Subscribe to CoffeeMug.ai. Our AI-powered platform will connect you with the right investors. With their guidance and support, you’ll soon have enough revenue to scale your business and make your ideas of delivering value to the market a tangible reality.
Q. What You Shouldn’t Do When Communicating with Investors
A. Do not be dishonest, arrogant, or hostile; do not try to negotiate in real-time, don’t over-optimize your valuation.
Q. Which crowdfunding platform is available in India?
A. Kickstarter, Wishberry, Indiegogo are popular crowdfunding platforms in India.
Q. What percentage of my equity should I give up in the seed round?
A. For angel/seed stage rounds, the conventional rule of thumb is that founders should sell between 10% and 20% of their company’s equity.
Q. What is the ideal size for a pitch deck?
A. The length of a pitch deck should not exceed 20 slides. Keep it as brief as possible. 10 slides are even better, as long as your pitch deck isn’t too crowded. A pitch with less than ten slides is likely to be undeveloped.
Q. In India, who may invest in startups?
A. Any individual, whether Indian, foreign, or NRI, is permitted to invest in a VC/debt/private equity fund as long as they have a minimum quantity of cash accessible.