Getting capital to accelerate your business is key to your overall company success. However, before your business can grow it has to first get itself off the ground. They way you can do this is through seed investments. A seed investment, similar to an angel investment, is the first funding step almost every business has to take.
Without seed funding startups often fail even before they start. But that’s not to say that a seed investment is your golden ticket to business success. In fact, a seed round that’s too small or too large can be just as bad as no seed funding at all because you might give away too much equity or create a disincentive for equity partners.
With these facts in mind, let’s take a look at how a seed investment can help your startup business.
What is a Seed Investment?
A seed investment is an early stage investment made by an investor for an equity state in your startup company. Seed investments typically occur pre-revenue and are used by startups to cover operating costs until the company can generate cash of its own. Seed funding can be a friends and family, angel, or crowdfunding investment.
Friends and Family Seed Investment
Like its name implies, a friends and family seed investment is an investment round where 1st-degree connections, such as your friends and family, invest in your startup company. The typical size of a friends and family seed investment is between $25,000 - $150,000. This friends and family seed funding is often the first investment a company takes.
While it may seem like a straightforward investment, friends and family seed rounds can have their problems. For example, entrepreneurs will often overvalue their companies early, and since your friends and family don’t know better, they’ll invest anyway. This causes valuation issues down the line if you try to take on more investments.
Angel Seed Investment
An angel seed investment is the most common type of seed investment. Angel seed funding comes from accredited angel investors who have a net worth higher than $1 million (not including their primary residence) or have an average annual salary of $200k. Angel seed investment rounds typically come in around $1 million in investment dollars.
Angel seed investments are seen as the holy grail of early-stage investments because typically the angel investor has industry insight or business experience to provide. This is why many companies skip the friends and family round and seek angel investments as its first investment round.
Crowdfunding Seed Investment
The third seed investment option is through crowdfunding sites such as Indiegogo. This type of seed investment is a newer development and it sometimes takes the place of an angel investment round as the primary seed investment option. However, the range of a crowdfunding investments can be from as little as $7k to more than $1 million.
The average time of a crowdfunding campaign is around 9 weeks. If you don’t meet your goals by the end of this period you’ll often lose out on any investments pledged during your campaign. For these reasons and more, it might be prudent to use crowdfunding as your third seed investment option.
Why is a Seed Investment Important When Fundraising?
A seed investment is important because it kickstarts your business growth. In fact, your seed funding round is the first step to larger fundraising rounds later on. For example, if you look at the diagram below, you’ll see that seed capital gets you through the “valley of death” and into profitability on the other side.
If you remember our article on the challenges of a growing business, you’ll know that almost every company wants to make it to the maturity stage. However, there are 4 stages that come before that mature growth, and you guessed it, your seed funding is the first one.
Without a seed investment, you lose out on the chance of ever reaching maturity. Without seed funding, you’ll never get out of the valley of death, which represents (hopefully) the only time in your business’s lifecycle when it’s both unprofitable and doesn’t make any revenue.
Even a $10k seed investment can be the difference between the hockey stick of growth and a sad decline towards business death.
Do’s and Don'ts When Getting Seed Funding For Your Startup
As you can see, there are many different ways to get seed funding. However, there are also many pitfalls to avoid when getting seed funding for your startup. To help you get the best seed investment possible, we’ve created a list of d things to avoid, which includes:
Try to do it yourself - Before you even try to raise capital, try to fund your company yourself, either through your personal capital or through sweat equity. This will help you keep a larger portion of your company in the long-run
Don’t charge an investor for the past - Few investors are willing to “pay” for the time or money invested by a company’s founder. Instead, investors want a fair valuation based on an analysis of your future performance. The last thing they want to do is overpay for an investment so you can recoup a year of unpaid salary and wages you think you deserve.
Do the math - With the above in mind, make sure that you give your company a fair valuation based on your financials. What’s more, you should only need a seed round for 3 months to a year, so make sure you ask for the right amount of money based on your financial projections
Don’t overseed - Even though more money seems better, this isn’t always the case. This is because you might give away too much of your company for a low valuation, where you could give away less for a higher valuation down the road - and still get more capital. Instead, make sure your math checks out so that you don’t overextend your equity.
Try other options - Beyond a seed investment, you can look for such financing products as business loans, invoice factoring, and more. You should always check the best options for funding your startup beyond the equity route.
Overall, a seed investment is an exciting time for your company. It means you’ve taken the first step into the arena of entrepreneurship. Just remember that it’s a long road and this is just the beginning. Keep yourself motivated and happy and amazing things will happen!