In the previous QuotaWiki post, we briefly introduced what series A, B, C fundings are. In this post, we are going to look at the very first funding round, “Seed Financing” in more detail.
Seed financing (which is also known as seed funding), is the earliest official equity funding process of the company. The reason why it is called seed is that it helps to grow the startup from the very beginning. For startups to grow their business, they need to develop a product, purchase equipment, and employ team members. The money required to do all these things is way beyond the amount a founder can afford. In most cases the early-stage companies don’t make money yet, they need to raise capital from outside. Therefore when founders spot opportunities in the market and are confident that they can seize them, they start raising money for the seed round. Seed financing will help startups to operate the business until they grow enough to generate revenue and raise series A funding.
Possible investors of seed financing are diverse from the founder's surrounding people such as family or friends to incubators, accelerators, venture capital companies(VCs), or angel investors. One of the common types of investor in seed financing is an “angel investor”. An angel investor is an individual who offers to fund early-stage startups. Some angel investors are grouped together and provide a larger size of capital. They usually come into the scene after the initial funding from the founder's family or friends but before the venture capital funding.
The amount range of seed financing is very broad (from a few thousand to several million dollars!) because startups in different fields require different amounts of money to run the business. Ideally, raising money that is enough to grow a business where you can raise the next funding is the best. Set a milestone that can give you meaningful indicators(such as customer retention rate or revenue growth). When can you reach that goal? Number of the months taken to reach that milestone times monthly costs for the operation will be the right amount of seed financing. For example, if you want to spend $20,000 per month and you are planning to reach the next milestone after 12 months, then you need to raise $20,000 x 12 mths = $240,000.
There are some differences between investment from an angel investor and VC. As the angel investors individually invest their own money, the funding proceeds much faster than that of VCs. VCs are handling other people’s money, so they need to go through more meetings between partners and have more rigorous standards. Although some angel investors are very thorough, usually angel investors are more generous in their terms and processes compared to VCs.
Seed financing usually proceeds as below:
While seed financing is your first funding round, investors have done this several times and are much more experienced than you. Most of the conditions in the contract will be reasonable, but always remember this is your first official funding round and these conditions can affect your business and following the funding round in the future. If a certain term doesn't look right, ask investors for an explanation!
Congratulations 🎉 QuotaBook wishes all the best for the journey of your business.
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Disclaimer: This piece is written for information purposes only and is not intended as financial or legal advice. QuotaBook does not assume any reliability for dependence on the information provided above.