People often confuse seed funding with start up capital. However, these are two very different concepts. Seed funding involves helping a business to develop an idea, creating the first product and then marketing that product for the first time. Companies that are about a year old and have not yet developed a service or product for commercial sale are the ones that usually require seed funding. These companies are generally so young that key management teams are not yet formed.
Who Provides Seed Funding?
Seed funding is mostly provided by angel investors and other private
investors. This is generally because the amounts required for seed
funding are relatively smaller compared to regular business funding
amounts. Most start-up companies require seed funding of around
$250,000 to $500,000. These amounts are sufficient for proving the
concept of the business and mitigating some risk. However, most
entrepreneurs feel that they need seed funding that runs into millions
of dollars. The reason for this is that many entrepreneurs try to
finance their way to profitability. Some entrepreneurs believe that
they have to ask for large sums of money to get the attention of VCs.
As a business owner, your risk extends to three main areas. This includes the team, market and technology. You can determine the right amount of funding by simply asking yourself if a small amount of money can reduce any of these risks within six months. You must seek only as much capital as needed initially.
With this seed money, you can get some insight on whether further investment of your time and efforts are worth it. Getting a clear picture about this will help you analyze things before making a multi-year commitment that is followed by larger investments. Many start-up businesses have found seed funding to be quite beneficial for them. However, there are a few things that you should know if you use an investor to obtain capital for your business.
- Even though the invested sum may not be very large, you will have to share control of your business with the investor.
- As the business owner, you may also have to let potential investors in on confidential business information.
- Private investors are hopeful of making 30% returns on the money they have invested. Ensure that you business can afford at least that much of return before you can invest in it heavily.
Remember that the market for your service or product needs to be a minimum of $1 billion if you want to qualify for this type of financing through investors. There is no doubt that seed funding is a wonderful tool for new businesses to get going, but you must have a clear cut plan in place for exiting the investment few years down the line.