Seed Round Financing: Everything You Need to Know
Seed round financing is an investment done in the early stages of a company's development.3 min read
Seed round financing is an investment done in the early stages of a company's development. The investments usually come from seed investors, the founder's friends and family members, or institutional seed funds. However, whenever possible, entrepreneurs usually prefer to skip the seed round and jump straight to larger Series A investments. The logic behind this is the idea that getting a major investor early in a company's life brings benefits, in the form of more money and a greater commitment to the company by the investor.
Why a Seed Round is Preferable to Starting With Series A Funding
The first reason a startup company should start with a seed round instead of Series A funding is the number of people involved. Whereas a single major investor may seem to make life easier for the company, seed rounds bring a large number of investors, meaning that the number of people that want the company to succeed is significantly larger, resulting in more resources and greater networks for the good of the business.
Another reason refers to the limitations a company has when jumping straight to Series A funding. Seed round financing allows a company to grow organically and mark some achievements before getting further financing. Therefore, the growth will translate into a higher trust in the company and significantly larger Series A funding.
Keeping low capital in the early stages provides the founder with much-needed flexibility. Often in a company's early life, the founding entrepreneur realizes that the initial plan is not the best way to go forward. However, if large amounts of capital were received beforehand, there's a greater chance that the investors will seek a certain path for the company and expects its founder to stick to the original plan. Smaller capital allows the founder to make major decisions while the impact isn't too meaningful, increasing the odds of the company being successful.
Seed financing minimizes dilution of the company's shares. Instead of needing to sell a large part of the company to venture capitalists in order to generate enough revenue, seeking financing when the company isn't yet worth very much allows the founder to keep dilution at a minimum, or raise more funds by selling the same number of shares.
Just because seed financing typically implies lower amounts than Series A, that doesn't mean it's easy to obtain. There are many entrepreneurs looking to convince the same seed investors and venture capitalists that their businesses need some funding to get to the next level. To gain their attention, a realistic plan and a functioning business model must be presented. Only after receiving the seed funds and properly using those to make the company scalable can Series A funding be considered.
How to Raise A Million Dollar Seed Investment
- The first step is realistically evaluating your company. It's understandable for an entrepreneur to overestimate the value of the company or the idea behind it, but before pursuing a seed investor, one must be realistic.
- Build a strong reputation by getting proper referrals. Although strong recommendations are needed to convince an investor to fund your company, you must remember that quality beats quantity. Referrals that come at too much of a price, or by the wrong people, should be avoided.
- Your company's life doesn't start when you get seed financing. You will need to properly function, with active customers and revenue, before convincing someone that your business has what it takes to reach the next level.
- Your business model has to be simple and easy to quickly understand.
- Don't try to pitch numbers when it comes to market size, as they are usually disputed by seed investors. Instead, try to build a broad and realistic picture of how big your market can be. You must also remember that investors are people, and a great story inspires anyone.
In a nutshell, seed investors need to be convinced that your business model can be repeatable and that you have the necessary strengths to successfully put it into practice.
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