Seed Funding: What It Is & Where To Get It
If you are a new business owner, you might look into seed capital to get your idea off the ground. But what is seed funding, where do you get it, and do you have to give up equity?
Seed funding is one of the best ways for new business owners to raise money when they have no track record or product to prove that they’re a good investment. Seed capital is a good option for entrepreneurs just getting started.
Read more to learn how seed funding can help your business grow!
Table of Contents
What Is Seed Funding?
Seed funding is an entrepreneurial investing buzzword that is often used interchangeably with seed capital and/or seed money. You’ll typically see these terms used in the same sentence as “angel investment phase.”
Seed funding is any amount of money, from any source, that helps move a business from the conceptual phase to the implementation phase.
Seed funding is typically a small amount of money that comes from personal sources like family or friends. This money is gained during the “seed capital” investment phase.
Seed funding isn’t just a gift or handout from personal sources, typically, you’re offering equity or a share of your future profits to the funder. Yes, this does mean your stepmom could become a shareholder. Proceed with caution.
Seed money is used to prepare a business for future rounds of equity financing from venture capital and similar sources.
While uncommon, it is possible for venture capitalists to offer funding during the seed capital phase.
How Does Seed Funding Work?
As an investor, even if they’re your best friend or family member, your goal is to get equity from your company that they can eventually liquidate.
Seed funding is meant for businesses that are looking to make an international public offering (IPO) or are wanting to sell their business within around six years. Seed funding will typically come in the form of lower amounts from non-institutional financers. These funders can be literally anyone.
You’re much more likely to have more seed funders than investors in future stages of financing. Raising seed money helps demonstrate to larger venture capital groups with more resources that you’re able to generate confidence in your idea/business/product.
Bigger, more complex businesses will require larger amounts of seed money. Your goal is to raise enough money to get to your next milestone. You should aim for a 12 to 18-month timeline to get the seed funding you need.
Giving Away Equity
Remember that soliciting seed funding means that you’re selling pieces of your business. You’re going to have to sell more of it in future financing phases, so you’re working with a finite resource. In a perfect world, you’ll sell as little of it as you can. Industry professionals recommend selling no more than 20% of your company during the seed round.
If you sell more than 25%, you’re going to run into problems in future rounds of financing. If you only manage to sell 10%, you’ve probably tapped into some sort of cosmic magic and maybe have a fallback career as a hostage negotiator.
When Do You Need Seed Funding?
Seed funding is a must for most first-time small business entrepreneurs.
The seed funding stage is one of only four different phases of funding typically required for a startup to become a full-fledged business. Seed capital, venture capital, mezzanine funding, and an IPO. The goal of seed funding is twofold: you need to secure funding to start your business AND attract more funding from larger investors.
Seed funding is almost always necessary as banks and major investors tend to be reluctant to invest in a new business with no history or record of success. It’s a risky investment, and it’s much easier for someone personally invested in your success (family, friends, etc.) to take that risk than it is for a larger institution with many irons in the fire.
If this isn’t your first rodeo and you’re able to display your entrepreneurial prowess through many (two or more) successful startups, there’s a chance you might not need to deal with seed funding at all. You could already have the funds from your previous businesses or have investors already willing to support your next idea.
Seed Funding VS Series A Funding
Series A funding is also known as venture capital. This is the step of the financing process that comes after seed funding.
The purpose of seed funding is to keep your business going long enough to be in a good place to pursue Series A funding.
During this phase, you will use your seed money and any other investments to build a prototype of your product, service, or idea and complete a comprehensive business plan to present to the investors during the Series A/venture capital stage.
In comparison to the seed phase, you won’t be looking to family, friends, and neighbors as much as you will be looking to venture capital groups and investors with much deeper pockets.
The funds raised during Series A will be used to expand your operations, hire personnel, and scale up your production with the goal of finally monetizing your product/service. The average successful Series A round in 2022 raised around $19.8 million.
Seed Funding VS Angel Investors
Angel investors are technically a form of seed funding, but they are certainly not the only source.
Angel investors are wealthy, accredited investors who offer cash infusions to startups in exchange for equity. They are typically considered high-net-worth individuals (HNWIs) and tend to come from the personal network of a startup’s founder(s).
Typically, angel investors act as individuals rather than as a group of individuals that have pooled their resources like venture capitalists. They also have the ability to be involved at any phase of business development and help build the company. Venture capitalists provide support in a regimented series of funding and tend to be more hands-off.
These angel investors can offer debt financing rather than equity financing, especially if the amount of money you’re borrowing is low. Can you see why they’re called “angels” now?
While angel investors are typically seed funders, angel investing can happen at any point in your business’ funding journey!
How To Get Seed Funding
You have to get seed funding anywhere you can, which isn’t the most helpful answer, we know.
You and your other business partners might be your main source of seed funding in the end.
If you decide to go with equity financing to fund your startup, you’re going to have to prove that people believe in your vision enough to give you money. This will show venture capitalists that you are serious about your business and have done the legwork to start the process, vs. you and your friends have just thrown money at an idea and are, therefore, a risky investment.
- Personal Networks: Friends, family, acquaintances, neighbors, and even coworkers are low-hanging fruit in terms of seed funding. Remember to be honest about your business and the risks. Otherwise, you’re going to risk over-straining your personal relationships.
- Angel Investors: These mythical beings are another great potential source of seed funding. They can be elusive, but there are networks like AngelList that can at least help you figure out where to start looking for them.
- Equity Crowdfunding: A more unconventional method of securing seed funding, crowdfunding by leveraging equity in your business to unknown funders on the internet is another option for new startups. This is still a new type of service, and these sites have their issues, but they could be a good option to raise money remotely if you don’t live in an entrepreneurial hotspot. Check out our article on the best equity crowdfunding sites.
What If You Can’t Get Seed Funding?
If you don’t have any luck with the seed funding options we’ve gone over above, there’s no need to panic! There are plenty of other options for entrepreneurs to find funding for their blooming startups.
- SBA Loans For Startups: SBA startup loans include funding options like microloans, Community Advantage loans, 504 loans, and 7(a) loans.
- Startup Loans: Amazing startup loans are available to new businesses. They will have reasonable borrower requirements and competitive interest rates and terms.
- Small Business Grants: This funding option doesn’t rely on your business taking on debt. Small business grants are a sum of money issued by the government or private organization to a startup/growing small business. The terms of these grants are usually extremely specific about how the money can be used and take a lot of work to apply for.
- Business Credit Cards: Check out our list of our favorite business credit cards that don’t require a personal guarantee to learn more about what cards offer the best options and rewards for your business.
- Entrepreneur Competitions: Pitching competitions can help you secure seed funding and even find angel investors for your ideas. Even if you don’t win the competition, attending and presenting is a great way to get your foot in the door of the investment world.
Final Thoughts On Seed Funding
Now that you have the resources to find seed funding for your new startup, go out there and get your journey started! If you still have questions, never fear; we have plenty of other resources for entrepreneurs.
Check out other financing options available for new entrepreneurs. Are you wondering if you even need to look for outside sources of seed funding at all? Then discover how much money you’ll actually need to start your business.