Seed Funding - Importance, Prerequisites, Steps to Raise and Equity Required - ALCOR FUND

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Seed Funding – Importance, Prerequisites, Steps to Raise and Equity Required

  • August 24, 2020
  • AF Bureau
Seed-Fundraising

Seed Funding provides the early-stage startups with the monetary support that can help transform them into successful businesses.

 

If raised the right amount at the right time it could prove monumental in the future of the startup. Read on as we take you to step by step through every aspect of seed fundraising. 

 

 

What is seed fundraising?

 

Seed Fundraising

 

 

Seed Fundraising can be easily understood by using an analogy of plants. A seed needs proper atmosphere, water, and soil to grow into a healthy plant.

 

In the same way, a start-up requires finances to be able to grow to its full potential. So, the process of raising funds for a business in its initial stage is known as seed fundraising.

 

The fund raised in this stage is also the first official money that a business raises. The money raised through seed fundraising is usually a smaller amount when compared to funds that are raised in future stages.

 

For example, let us suppose you have developed software that takes care of all the accounting needs of individuals as well as businesses.

 

Now to transform this accounting software into a profit-making business you’ll need to work on it. You’ll need to pay your employees, pay for the infrastructure and operating expenses.

 

And all this when your business hasn’t even started making money. That’s where seed fundraising comes into the picture. Seed fundraising finances your start-ups and businesses.

 

Why is seed fundraising important?

Seed Funding proves to be very important for any business. seed fundraising provides you with funds even before your business has started earning.

 

It helps meet your fund needs and makes up for any insufficiency you might be facing. It provides you with working capital to smoothly run your day to day business.

 

Along with that it also makes scaling up your business a lot easier. It reduces the risk of the founders and you get to collaborate with partners. In all it takes care of your costs right from marketing, hiring to development.

 

How long does it take to raise seed funding?

This is another question that often garners a lot of interest from the founder’s side. Now, every startup is different and this time will vary from case to case.

 

But going with the average industry standards we can assume this period to last anywhere around 3-6 months. However, if you find this duration has gone over 9 months then that might be a sign for you to do a check of what isn’t working.

 

Prerequisites for seed funding 

When it comes to prerequisites and formalities for seed funding things are simpler as compared to that of funding in further stages. There is less paperwork and fewer restrictions.

 

The legal fees and interest rates are also towards the lower end. That being said there are still important aspects that have to be carefully followed.

 

  • Financial Knowledge

As a founder having financial knowledge becomes of utmost importance for you. You must know the process of dividing equity and have an accurate valuation of your business.

 

And also, a thorough understanding of your income and expenditure. This is not only required to ensure your business does well but also to safeguard it.

 

With your equity stake, there also comes decision making power. If you are not well equipped with the number game you might end up losing your decision-making power in your business. 

 

  • Legal Knowledge

The process of seed fundraising will involve a lot of documents and there will be contracts. To get through all this unscratched you would need legal knowledge and a good lawyer by your side. 

 

How do you raise seed funding?

 

raise seed funding

 

Decide on the source and research about the investor– As we saw earlier there are numerous sources from where you can raise your seed funding. Now, every source comes with its advantages and disadvantages.

 

You must understand your business and then decide which would be the right source for you. For example, let us suppose you have no means for bootstrapping and don’t want the burden of debt funding.

 

In such a situation you could go for angel investors or venture capital funding. Once the source is decided you then need to choose among the different interested investors.

 

Continuing the earlier example of your business idea being that of a software. You could look into angel investors or venture capitalists who are known to fund technology-based companies.

 

  • Prepare a pitch deck

You might have an amazing idea but if you cannot put it across in an impactful way you will not be able to get an investor. What makes a seed funding pitch deck extremely important is that it is usually the first impression of your business idea.

 

This will convince the investors if they want to fund your business or not. So, give adequate time to preparing your pitch deck.

 

pitch deck

 

Get in touch with prospective investors – Once you know what source you are targeting and you have a pitch deck prepared, start contacting the prospective investors. Get in touch with them and set up a meeting.

 

  • Prepare and close the deal

Do thorough research to prepare for your presentation and give in your best to close the deal. To convince investors to fund your business will need your presentation to be flawless.

 

It should entail all the relevant details the investors could be interested in. For example, your presentation should state the need for your business, business model, target sector.

 

And also, the opportunity, research work, and a demonstration of product/service include all of it in your presentation. This gives a holistic view to the investors of what they will be investing in.

 

 How much seed funding to raise?

This question is one of the most popular ones. And the instant answer that comes to you is ‘the more the merrier’. But you must proceed with caution. More funds will also mean more liability on your part and more equity stakes being given away.

 

A simpler way to come to a decision is to decide how many months you need the funds for. For example, let’s say you need the funds for the next 12 months. And for each month your expenses come to around Rs. 50,000.

 

So, you’ll be looking to raise approximately Rs. 6,00,000 (50,000 * 12) from your seed funding round. But do ensure you can raise enough funds to help your start-up grow to the next level.

 

How much equity should you part with for a seed investor?

The figure that’s most common in the market is somewhere between 10% – 20% of the equity. Under no circumstance should this share increase above 20%.

 

A method to calculate how much equity you should give your investor could be reached by balancing investment and valuation. That is the equity given to investors and the valuation of the company.

 

For example, according to your valuation, your company is worth Rs. 70,00,000. Now, if an investor is going to fund you Rs. 7,00,000 then that is worth 10% of equity. 

 

Financing Option 

 

Financing Option

 

Equity 

This option requires founders to come up with a valuation for their company. So when investors invest in the startup they get an equity stake in return for their investment.

 

This option tends to get a bit tricky since estimating the valuation of a company is a difficult task. That’s why it’s also advised to get professional help for the valuation.

 

Convertible Notes

Convertible Notes are a debt instrument. This is generally used when the startups don’t want to give out the valuation of their business in the early stage.

 

So, in return for the investor’s funds, the startup issues a debt instrument that states that this investment could later be realized in the form of equity.

 

SAFE

 

SAFE

 

SAFE stands for, Simple Agreement for Future Equity. It could be said to be very similar to a convertible note. Although instead of being a debt instrument (as in the case of convertible note) it is an agreement.

 

Here, when an investor invests in the startup he/she does so on an agreement that in the future they would be able to purchase the company’s equity. All the terms and conditions are mentioned in the SAFE.

 

And that’s why a startup would be called a SAFE startup if it has raised money through the SAFE instrument. However, only those startups can issue SAFE notes that are incorporated.

 

Conclusion 

There can be no denying that seed fundraising plays a very crucial role in the future of any business. But don’t let big numbers on a piece of paper influence your decision.

 

A detailed study of equity being parted with, terms of payment, returns, and other factors should form the basis of your decision.

 

You can also use our venture capital report to evaluate your business and get access to 1000’s of investors that are looking to invest in your company.

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