How necessary is seed funding for a startup?

Year in and year out, many small to medium-scale businesses come to life. However, not all of these establishments stand the test of time. Funding is one of the major issues leading to the fall of small businesses. From an overview, most startup runs begin with the personal savings of the founder, or founders, as the case may be.

Only a few have exciting business ideas that will make them fit position strategically, pitch themselves and attract investors. Investors who get an equity share after investing in a business are said to have contributed seed capital.

In this article, we will define seed funding and answer some of the questions that startups have about it. So, shall we proceed?

What is seed funding ?

Seed funding is otherwise called seed capital or seed money. It refers to the sum of money pumped into a business by an investor, usually in exchange for an equity share. The amount of capital an investor provides guarantees them a part of your trading profit.

Usually, depending on the contract terms, most seed-funding investors have a say in the Services and general business development process. Meanwhile, this may not be the case as they can choose to be a non-participating shareholder.

Seed funding dates back to the early ages before civilization. In those times, parents and older siblings invested in their childarn or younger ones. This form of seed funding often comes with a non-expectancy bid for returns. Instead, a call for return is usually a form of discipline to keep the young trader or businessperson with the zeal to make profits amidst all odds. One of the sources of this type of seed funding is Africa. In West Africa, there have also been examples of husbands setting up their wives’ enterprises by donating seed money.

As expected, seed funding has advanced with the social transformation from agricultural economies to industrial societies. Startups and corporate bodies have adopted the age-long culture of seed funding. It has become an integral part of their venture capital raising process. Investors are increasingly receiving rewards in the form of stock shares. What are equity shares, then?

Understanding equity share

Equity shares are also known as ordinary shares. It refers to fractional ownership that accrues an investor’s right to share profits and bear entrepreneurial liability as and when due. That is to say; equity share is the right of an investor.

For instance, investor A contributes $ 500,000 to business B as seed capital and is entitled to 15% equity. If the business grows $ 1 billion strong after ten years of entrepreneurial practice, investor A can also have accumulated $150,000,000 as revenue.

In the same vein, equity shares do not only give returns in terms of finances. It also confers the right to vote on the investor, who also doubles as a shareholder. Voting here means the free will to influence the policies and decisions made in board meetings or top management teams of a company.

Is seed funding necessary for a startup?

Yes, seed funding is necessary for a startup. It fastens the growth process and removes time constraints on business plans and strategies. It also gives a startup the financial confidence to hire the best talents and build a formidable team to help further its course.

Importance of seed funding.

As said earlier, seed funding refers to the sum of money generated from the inputs of investors in a business. They help a business, particularly a startup, to thrive and relieve it of its financial obstacles. Generally, seed funding is important to a startup because:

● It determines how to set goals that are achieved.

Funding is a significant problem faced by businesses. It also influences their plans, goals, and strategies. However, with seed funding, a startup can set expansionary and financial goals and achieve them.

Financial objectives can be both immediate and long-term.

Seed funding accelerates businesses heavy on social innovation and corporate social responsibility.

● It provides working capital to finance ongoing and abandoned projects.

Secondly, seed funding is the capital to finance ongoing and abandoned projects. In most cases, initiating projects is one reason startups call for seed capital. Old businesses also call out for seed capital to finance their ongoing project. Therefore, a startup or mainstream company needs to have a project with a super plan to easily attract investors who want to sow venture capital in their business.

● Seed funding is the capital to hire the best hands for the job.

Team building, after funding, is the heart of a startup. If a startup can get sustainable seed capital, it becomes easy to hire the best hands. Talents who can contribute technically to the growth and success of a firm are easily attracted when there is more than enough money to keep them. A startup with the best team is bound to record steady growth within its industry.

● It commands efficiency.

Sequentially, seed funding commands efficiency. Without enough working capital, most startups turn out to be inefficient. The gap that seed funding fills on the ground of efficiency is immeasurable. It also removes or substitutes labor-intensive practices for capital-intensive ones.

● It simplifies the process of birthing new ideas.

Another advantage of seed funding to startups is that they can easily birth new ideas. When money is available, startup founders and superstars can think of the best ideas to help them scale faster and bigger. It also gives them the free will to implement these ideas to get the best results.

● Startups can use seed funds to finance their business location.

Lastly, seed funding also paves well for building a startup’s identity. One of the best ways to define a business identity is by owning a space. With a seed fund, a business place, quality branding, and place marketing are easily done. Undeniably, a good place for your business also increases efficiency and gives you a clear view of things. Working from your place is forever an edge as a startup business or organization.

What is the alternative to seed funding?

Other funding sources for a startup include:

Retained earnings.

Angel investors.

Debt capital

Bank loans.

Some FAQs about seed funding for startups

Below is a list of some FAQs about seed funding for startups and expert-vetted answers to them:

How can I generate seed funding for my startup?

For startups, there are various ways to generate seed money. Some of these ways include publishing a prospectus to call for shareholders, fund pooling from business partners, pitching for grants in exhibitions, and personal savings of founders or founders, to mention a few. Another way to generate seed funds is through transfer payments. The government gives a transfer payment as a form of support for a venture without any expectancy or return. Mostly, they are given as support to startups or other existing businesses whose activities are innovative.

Is grant the same as seed funding?

Yes, a giant is a form of seed funding. Meanwhile, a grant does not usually attract a return when won in a pitch deck. Grants are given by individuals, businesses, and the government (either directly or through its agencies or parastatals) as a gift. A grant-winning startup is expected to use the money for business expansion and to boost its revenue.

Should all startups offer the same equity share?

No, all startups should not offer the same equity share. An equity share is a return that accrues to an investor. Therefore, the amount generated as projected revenue should influence a startup’s decision when measuring its equity share offering. Likewise, the volume of the seed capital contributed by an investor should also affect the share to be given to an investor. When these things are implemented, the startup will not run at a loss or lose most of its working capital to equity share payouts.

Is crowdfunding a form of seed funding?

Yes, crowdfunding counts as a type of seed money. It typically does not call for returns to the initial investors, just like grants, because they are received as gifts. Businesses frequently use crowdfunding to focus on social innovation projects like youth empowerment, child support or IDP, and rehabilitation financing.

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