- By SeedInvest
- July 5, 2022
- 7 minute read
Seed funding has increased dramatically in recent years, both in terms of the number of startups taking advantage of seed funding and the amount of capital raised in seed funding rounds. Crunchbase data reveals that between 2016 and 2020, there were 23,000 companies that successfully raised seed-funding up 30 percent compared to the previous five year period.
Looking back over the past decade, Crunchbase data also revealed that the median seed deal has grown from $1.5 million to $4 million, and the average from $1.7 million to $4.6 million.
If you are a founder of an early-stage startup in need of capital to grow your business, seed funding is likely on your radar. This post is dedicated to answering top questions about seed funding, including:
- What is seed funding?
- What are the different types of funding rounds?
- Why do startups need seed funding?
- What are the sources of seed capital?
- How can you raise seed capital?
What Is Seed Funding?
For a startup that has established a solid base with the money raised through pre-seed funding, seed funding is the next step. Where pre-seed funding often comes from friends and family or angel investors, seed funding is often the first institutional round of funding that a startup will go through. By this time, the product or service has gained enough traction to attract investors with more capital and greater institutional interest.
The purpose of seed funding can be to raise the capital needed to help a business grow, increase its traction and valuation, and get it ready for larger Series A and B funding rounds. Seed funding enables an early-stage company to finance some of its first steps, such as market research and product development, and enables a company to take its vision from idea to reality.
Generally, investors provide funding in return for equity in the company. Seed funding usually comes after pre-seed funding and before a Series A round.
In some cases, a company raises enough seed capital to become self-sufficient, generating its own revenue with no further need for funding. In other cases, seed funding helps a company achieve milestones that enable it to progress to other funding rounds like Series A, B, and C rounds.
Why Does a Startup Need Seed Funding?
Starting a new business takes time and money. Capital constraints can make it difficult to bring even a great idea to reality. Seed funding can help by providing the runway you need to get your business off the ground.
You can use seed funding to reach milestones that will help you to get to your next funding round. Here are some common ways startups use seed capital:
- Product development
- Infrastructure costs
- Marketing and PR
Where Does Seed Funding Come From?
In the early stages of a company, funding can come from a variety of sources. In many cases, pre-seed funding comes straight from the pockets of startup founders and their families and friends. When a company progresses to seed funding, the sources for funding generally broaden beyond the founder’s network to include equity crowdfunding platforms, angel investors, angel networks, incubators, accelerators, and VC firms focused on seed funding.
How Much Money Can You Raise with Seed Funding?
According to Crunchbase, seed rounds range $10K to $2M, and those figures also appear to be changing frequently. Crunchbase data also revealed that the median seed deal is now $4M, and the average is $4.6M, which is supported by other research as well.
How much money you raise in a seed round is dependent on industry, product, operational costs, team, and business model, to name just a few of the variables that come into play.
Ideally, your seed funding targets should depend on the current financial status of the startup. What is the company’s burn rate? How much funding is required to build the product and gain initial traction? How much of a runway will you need to make it to your next milestone or funding round? How will you balance the equity demands of investors against your capital needs? These are all factors that will determine the size of seed funding you should seek.
When Should You Raise Seed Funding?
Before investors write their checks, they want to have a reasonable expectation of a positive return on investment. They want to know there is a real opportunity to make money.
There are a few prerequisites if you want to have a successful fundraising campaign. At the seed-funding stage, you should have most or all of these requirements:• An MVP
• Signals for market fit
• Customers, and their feedback
• A viable business model
• A small team, or clear plans to hire
• Initial revenue is helpful
The goal of seed funding is to provide you with the capital you need to take your business to the next level, whatever that level may be. So, you should consider preparing for your fundraising campaign as soon as you know what your goals are and how much capital it will take to help you reach them.
How to Raise Seed Capital
Fundraising can be a long process, so the sooner you have your fundraising strategy in place, the more likely you are to have capital when you need it.
Here are some best practices to help you build a successful fundraising campaign:Always be building your network.
You should always be networking, even when your company is no more than a vague idea on the back burner of your brain. The more people you know and the stronger your network becomes, the more likely you will attract the right investors to your startup. Look for industry and pitch events to attend and seek out other opportunities to get your name and face out in front of influential people in your industry.Do your homework.
Learn everything you can about how fundraising works. Research the investors you’re considering approaching. Look for investors who have a solid track record of investing in companies in your industry since they might be more interested in mentoring you and helping your business succeed.Prepare or polish your pitch.
If you have already been through a pre-seed funding round, you likely have a pitch prepared already. Be sure that you have updated your pitch to reflect the milestones you have achieved and the ones you are targeting now. Be sure your pitch shows investors what your company is all about and the problem you are trying to solve. Here are some items to include in your pitch deck:
- Business model
- Target market
- Revenue growth plans
- Unique value proposition
- Plans for customer engagement
- Roadmap and milestones
- Use of funds
Although you may be concentrating on funding from a particular source, remain open to funding opportunities you may not have considered. For example, although you may be looking for an individual angel investor, you may find it easier to achieve your funding goals by leveraging an equity crowdfunding platform or and an accelerator program. Funding need not come from just one source. The wider net you cast, the more investors you may find who are willing to help your business grow by providing the capital you need.
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