Breaking Down Seed Funding For First Time Entrepreneurs

Even ground-breaking concepts require some assistance to get off the table. An entrepreneur typically has to raise money for development, marketing, and talent management when they have a fresh business vision. Raising seed funds not only helps you to arrange cash for business needs but also helps bring seasoned advisors and investors to the board.

The seed stage is the first round of investment for startups, and unless the founders are high rollers with extensive expertise, they will look to venture capital and angel investors to help them get there.

In order to secure seed funding and expand their firm, founders must carefully follow a few rules. Prior to meeting with potential investors, leaders should be prepared and have a list of references who can support the concept. Entrepreneurs should think outside the box when it comes to raising money and should never be afraid to take risks.

How Does Seed Capital Work?

Seed capital rounds are very different from subsequent rounds. There are several participants because the average investment made by each investor typically ranges from $100,000 to $500,000. Additionally, a few angel investors also often make additional investments in the business.

Angel investors usually are founders and team focussed and have a passion for the company that goes beyond the basic need for a strong return on investment (ROI). Serial business owners and previous CEOs with experience of high value exists or taking companies public are some of the illustrious angel investors. In order to start business operations, the seed stage "plants the seed" for a startup to succeed.

The question of what and when however, is not as difficult as the question of how and where? Procuring seed funding is not easy where so many burgeoning startups are in competition. Therefore, you need to keep in mind the following points to successfully start your seed funding process for your venture.

1. Be Prepared?

One thing to keep in mind above everything is - “always be ready”.

Before jumping headfirst into the seed capital round, business leaders need to have specific estimates and hard figures ready for venture capitalists.? Founders must have a comprehensive understanding of venture investors' methods for choosing investments.

Some documents and data usually requested by investors:

1. Business Plan - A detailed strategic plan to support the idea and vision
2. Investor Presentation - A crisp 10-15 slides presentation covering the basics about the company, entrepreneurs, business model and investment required
3. Financial Plan - A detailed 3 to 5 years financial plan to show your business growth, cash requirement at various stage of the business and potential exit plan
4. Financial and Management Reports - Company’s historical financial statement - P&L, Balance Sheet, Cash Flow, KPI Reports, Traction Report, Sales Funnel etc.
5. Historical Audited Financial Statements and Tax Filings
6. Key Management CVs

Put everything in a ‘Data Room’ and share with investors as and when required. Proper Data Room management is key to passing investors due diligence requirements. Venture capitalists will need to be aware of a business' precise financial requirements as well as its detailed strategies for allocating investment funds. There will need to be a justification and defense for a thorough cost prediction. Founders should have a clear understanding of how much of the company they are ready to give up in order to maintain credibility and protect themselves from signing an unjust term sheet. They should also be fully aware of the objectives and interests of the investors, as well as the capital structure of the proposed finance.

2. Find Investors

The goal of seed capital rounds is to attract investors, which is simpler if startups have already established themselves and proof of concept with some basic traction is in place.?

Human psychology has repeatedly demonstrated that if someone else has already made the decision, another person will feel more at ease making the same choice. Even venture investors who love taking risks don't want to be the first to do so. And hence it is sometimes advantageous to first pitch to family and friends to raise funds.

It is also beneficial that some small investor can make a pledge to invest, subject to the entrepreneurs finding a lead investor. . In this approach, the committed angels can confirm their choice to contribute X amount in the startup when potential investors contact them.

3. Set Yourself Up for Success

Entrepreneurs shouldn't be scared to approach the VC world directly if they don't already have mentors and angel investors as contacts. Prior to business acumen, networking is the most important tool and skill that an entrepreneur needs.

Applications are now being accepted for startup mentoring programs and incubator businesses. In exchange for a portion of equity ownership, several programs choose applications that receive on-site coaching and a minimal investment to get the business off the ground.

4. Seed Planting Techniques

Reaching angel investors in the age of technology is simpler than ever because they enjoy using social media platforms and communicating with driven entrepreneurs. Many lesser-known venture capital (VC) firms concentrate on supporting regional entrepreneurship in regions and localities outside of major startup centers.

Additionally, entrepreneurs may think about using the recently popularized crowdfunding method to raise seed money. Now, crowdfunding websites also serve as a platform to connect investors with companies.

5. Locate a Responsible Driver

In seed stage rounds, the presence of a lead investor is crucial. Generally speaking, seed capital fundraising involves a greater proportion of companies and investors than other rounds. Few people, though, actually take the initiative to "lead" the round.

Leading the round entails taking a chance by investing significantly more money than other important players. Due diligence and establishing the conditions for subsequent rounds fall under the purview of leading VC companies. As a result, they restrict their role as main investors.

It's crucial for founders to identify a lead early on and later on secure further funding with tactical value-add ideas. To take on this crucial role, leads must be wholly passionate about the prospects for long-term growth. Throughout this relationship, founders must be careful to space out fresh news and maintain the excitement.

6. Never give up

Once more, it's critical to maintain an entrepreneurial mindset and optimism without losing credibility through a foolish idealistic outlook. Staying truthful correlates with a strong commitment by the founders that they believe in the firm and will make sacrifices for it. Business plans should incorporate the "best worst-case scenario” as they say hope for the best and prepare for the worst.

The business typically lacks a track record in early rounds, therefore VC companies and angel investors are more likely to place their trust in the management team. A company can establish traction and succeed in later rounds of investment, which are necessary for growing and scaling the business, by keeping all of these suggestions in mind.

Final Verdict

Funding for seed stage capital enables entrepreneurs to quickly implement their novel concepts. The seed stage varies from prior phases in that it involves a larger number of important stakeholders, including angel investors who are more interested in aspects other than ROI.

Before meeting investors, founders should do their homework by coming up with concrete data and assembling a team that will support them when they challenge venture capital firms. Entrepreneurs should naturally be inventive in their approach and should never be afraid to put in extra effort or confidence.

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