Starting a business takes time, a little luck, and definitely some money. When a startup is transitioning from the idea stage, entrepreneurs immediately begin seeking external financial support.
Why raise money?
Unfortunately, without money, a startup will quickly die out. Financial backing is needed for business expansion, covering costs such as staff, technology, marketing, and sales. Securing funding requires time, and dedication, and can often be complex, but it is a necessary step to get your idea off the ground.
Funding for startups
The funding journey consists of multiple stages, beginning with pre-seed funding, where entrepreneurs share the potential of their business idea and raise money to create real prototypes. For more, check out our full breakdown of pre-seed funding.
Following pre-seed funding is seed funding, series A funding, series B funding, and potentially some more. Seed finance is for startups who have built a solid enough foundation through their early fundraising, and are ready to raise some more serious capital for a genuine product.
How does seed funding for startups work?
Funded by institutional and angel investors, seed funding is usually capital provided in exchange for an equity stake in the company or for a share in the profits of a product. Startups fit for this stage must have a high-quality team and a clear product-market fit, capable of demonstrating to investors that their company is worth backing.
Unlike pre-seed funding, which involves earning enough money to make a prototype of your main product, the seed stage of a business is designed to give you enough money to take that product into the market. The main difference is the amount of capital being raised.
What is a seed investment round?
During seed round funding, startups publicly present their business ideas to private equity investors, who raise money from limited partners. Additionally, they pitch to venture capitalists and firms, which typically focus on investing in high-growth startups with significant market potential.
Startups also apply for accelerators, who provide funding as well as hands-on mentorship and networking opportunities. If lucky, an entrepreneur may be approached by an angel investor, a high net-worth individual who invests their own money and shares their industry expertise with a startup. Usually the most promising startups in the seed funding stage are the ones who have accomplished the most with very little money in previous pre-seed or bootstrap funding stages.
This seed funding process continues until the startups raise sufficient capital to advance to the next funding stage, which may take between 12 to 18 months. Depending on the industry, seed funding may look to generate anywhere between $500,000 to multiple million. Startups should plan for the money raised during the seed funding phase to support them until their next round of funding — Series A.
How to get seed funding
Before you start pitching for seed funding, it’s important to consider a couple of key things, the most important of which: are you ready to give up a stake in your company? This is the key thing most investors are after, and you need to be comfortable with that. If you are, create a pitch deck that puts together all your relevant info, including your business vision and mission, financial goals, target market, and overall pathway to success. This is about persuading investors that your business is worthwhile.
You can get funding from a variety of sources, including venture capitalists, angel investors, crowdfunding, as well as startup accelerators. Additionally, you may be able to get some money from friends and family, as well as putting up your own personal money. If you have successfully convinced an investor, make sure to negotiate a fair deal that everyone is happy with, and put everything in writing with a signed contract.
How do investors pay a startup?
At the beginning of its development, a startup won’t be able to pay investors back through equity. This is because the business might not be ready for a valuation yet, so instead, the investor can loan cash to the entrepreneur in the form of a convertible note which can be converted into a certain amount of future equity. It can also be done through an agreement known as Simple Agreements for Equity Funding (SAFEs).
What happens after a seed investment?
Many rounds later and hopefully some supportive funding to back you up, it’s time to get to work, expand your business, and excel it to new heights so you can pitch for Series A funding in the future. With the right resources, an allocated budget, and support from investors and mentors, you’ll be on the path towards success.
How Melbourne Connect Coworking can help
If you are an entrepreneur and looking for a place to set up your hub, Melbourne Connect Co-working has a variety of flexible working spaces for you or your team. We are a diverse community of innovators, thinkers, and business pioneers—we’d love for you to join! Get in touch to learn more about what we offer and how we could be the space for you.