Seed Funding — Things You Need to Know

Sarath CP
The Startup
Published in
6 min readMar 21, 2019

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Do you know about seed funding? I know you must have heard about these words, but have you ever considered the importance of this concept? Why are several entrepreneurs incorporating this while operating the business in the race? And more importantly, how it can be used?

Are you the one who is looking for the answers to these questions? Yes! Not a big issue! This article will help you in finding all the solutions related to seed funding so that you can also enjoy the maximum benefits associated with it.

Image credits: Andrew Neel on Unsplash

There is no denying the fact that with the advent of technology and global opportunities, entrepreneurs have a plethora of options when it comes to funding, ranging from grants to crowdfunding.

And another brilliant option is seed money. But we have an understanding of the crowdfunding and grants. So, the question arises about seed money or seed capital.

No doubt, a business has different stages, from starting a business from a single idea to making it a success in the race. All business owners have to deal with several issues.

Don’t you think this process is quite similar to that of a plant?

Just like a seed requires proper care and watering to sprout into a plant; an organization also needs the nurturing of finance to explore and grow.

We believe that now you somewhat understand my point. So, let’s start with the proper definition of seed funding to get a better perspective about this concept.

What is Seed Funding?

Before we embark into the definition, we would like to clarify that although the seed funding, seed capital, and seed money are different terminologies, the meaning of all these terms is similar.

Firstly, let me explain to you about seed funding is a type to equity-based financing in which an investor invests capital into a business during the early stage of the company, in exchange for an equity stake. In short form, the money or capital which is done at the nascent stage of the business is known as seed capital or seed money.

As we have started in our previous blog posts, the money or capital funding is the lifeblood of a growth-based startup. In order to produce the desired or potential growth of the business, companies have to get the maximum capitals. One more thing that I want to highlight here is that several entrepreneurs mistakenly believe that the seed capital is the money which covers only the initial office expenses.

Therefore, they restrained themselves from not incorporating their personal cash while operating their business. But this is not the right way. No matter from where you are getting it whether it is from founders, friends or families, only one thing that you need to pay attention to is that you need to keep the flow of finances to enhance the company’s growth.

What is the Purpose of Seed Funding?

Understood the definition of seed funding? Great! The next podium in your way is to understand the purpose of seed funding. As a matter of fact, every business owner wants to upgrade their business and finances helps in doing that. And if you lack enough capital for the growth of your business, then it will be quite cumbersome to operate your business.

So, are you the one who is looking to enrich your business growth? Then we think that you know the purpose of the seed funding. The primary goal is to get a business up and running and off the ground.

And seed funding offers simple and effective funding solutions to help new companies get off the ground. That’s why it is said that seed funding has a lot more to it than what meets the eye. It is required for the early expansive market research, product development, and other initial stage operations.

What are the Sources of Seed Funding?

Now that you have an idea about the meaning of seed funding and the purpose of seed funding. So, now the question arises about the sources of seed funding. While thinking about the financing of your startup, it is essential to understand the different types of potential investors.

Not every wallet is right for you!

Hence, you need to figure out the best sources that can provide you the maximum amount in order to put your business off the ground. Common sources of seed funding are- angel investors, accredited investors, friends, angel groups, and equity crowdfunding investors. Do proper research work before even approaching any source in order to fund your startup.

What is the Difference Between Seed Funding and Early Stage Funding?

As we have said that seed funding is the funding that is done at an early stage of your business, so you must be thinking, is it the same as early-stage funding. Both the financing are being performed in the same period.

Confused?

No doubt, we have defined seed funding, so, now let’s look at one example so that you can have a better perspective.

Having stated that seed money is funding collected from investors and used to start a business so that business owners can grow their business.

Let’s suppose you have developed accounting software for your business and you are looking for funding. And then your family or friends came to rescue you by investing $10,000. That’s the price is known as seed money. And again if your software needs revolution or updates, then angel investors may take a liking to your product and help you develop and mass produce it.

But in return for their investments, they might own a percentage of your business. Once you are done with all the developments and running and turning a profit, you can pay them back, or they can sell their stakes to others who are looking for startup investment opportunities. That’s is known as seed funding.

What Is Early-Stage Funding?

So, now you have your fully developed accounting software that is being shipped to customers. After that, you are wishing to expand it by hiring employees or streamlining your production so that you can operate your business. Although you are turning a profit with your existing business, it’s not enough to cover the costs of daily operations and the expansion.

Here comes the role of early-stage funding. Well, this type of funding comes into two forms- Series A and Series B.

Let’s start with Series A financing. It is used to generate more funding than seed funding. However, for this funding, the risks are quite higher. At this stage of business, venture capitalists are most likely to invest in your business. If you think which methods they choose, then we want to clarify that it involves allocating preferred stock to investors.

If you are still not satisfied with the way your company is turning a profit and wishing to have additional funding, then Series B financing can take place. This kind of funding is used in order to increase the production, compete for head-on with competitors, and to execute a marketing plan.

More importantly, during this stage, the criteria for funding your business involves how your company stacks up against its main competition and evaluating the profit forecasts. But the risks are lower and funding limits are higher than Series A.

TakeAways!

Well, I believe that now you have a better understanding of seed funding and why several entrepreneurs want to incorporate it into their business strategy. There is no denying the fact that finances are the lifeblood of the business. If it stops at some point in time, then the operations of your business become cumbersome.

And especially in this competitive world, everyone wants to make revenue as much as they can. So, look for the right alternative to get proper funding in order to put your business off the ground. May success attend you!

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Sarath CP
The Startup

Digital Strategist and Growth Hacking Specialist worked for both startups & big brands, helped them to build a strong brand presence and achieve growth.