Seed Funding is the amount of capital received by a startup to support its cash requirements until it is able to generate operating cash flow of its own. It is also an early-stage round of funding and is used for preliminary operations.
What is a Seed Round of Funding?
In the days before the emergence of equity crowdfunding a seed round of funding was the first round of funding. With time, pre-seed funding has become the initial round of capital and provides the basic foundation to the business while seed round ranges from anywhere between thousands of dollars up to as much as $5 million.
Seed Funding is the capital received by startups after they have survived what might be considered “infancy.” The startup is still in the idea stage but by the time it has reached the seed round the business has a better chance of working as it has already been vetted.
At this point startups may not have the complete plans or core-employee team by the time they reach seed round of funding. They’ve reached this stage by identifying the economic benefits, market risks and scope of success before them.
Sources of Seed Funding
In many cases, the sources of pre-seed and seed rounds of funding are similar. The early-stage rounds of funding come from friends, family, or the founders themselves. Some startups can even receive government grants. Seed funding is often obtained from angel investors, venture capitalists, and crowdfunding investors. Investors can offer seed funding as loans or in exchange for equity or preferred stock.
Crowdfunding has become a significant source of seed funding. Specific crowdfunding platforms like SeedInvest, Republic, etc. are used by the startups to get a reasonable amount of equity crowdfunding from a large number of investors in exchange for an equity stake in the startups.
How is Seed Funding different from the other rounds of funding?
Seed funding holds a specific position in the life cycle of a startup. It is less risky as compared to the pre-seed round, however, it is quite riskier than the later stages of funding like venture capital funding and Series A+ rounds of funding.
At the stage of seed funding, the value proposition has been validated but investors can still not see a clear future of the product or service. The future cannot be evaluated on the basis of revenues or growth and there are no clear indicators of success or failure.
On the other hand, the future rounds of funding, like Series A+, are less risky and the capital raised is used for the expansion of business through streamlining the operations and adding employees.
To use an analogy: pre-seed helps to fertilize and prepare the land. A seed round helps to sow the crops and the further rounds assist in more and more growth and output.
What is Seed Funding used for?
By the time a startup reaches the seed round of funding, it has already started generating revenues and built out some sort of product. However, more funds are required to align the product to the market and to scale and grow the product among competitors in the current market.
The Bottom Line
Seed round is one of initial rounds of funding that helps build a solid foundation for the business. Businesses are still relatively small at this stage. Once the founders have prepared themselves and the product through the pre-seed round, a seed round of funding provides the capital to start generating profits. New team members are hired, and more knowledge is gained about the market. This round also facilitates tweaking the business model to fulfill the changing requirements and helps the startup grow.
