What is Seed Investment and how to obtain it?
Daria Iniewski | Growth Marketing Manager
25 May 2021 • 10 min read
What is Seed Investment and how to obtain it?
There are only very few startups that are able to grow and evolve without external financing and it’s called bootstrapping.
Everyone or almost everyone who has ever pondered on launching a startup has also been looking for some ways to finance his venture.
If you have even some limited knowledge of investment rounds, you have probably come across the following terms:
In this article, I would like to focus on the first type of investment round – Seed Investment and entirely clarify all the doubts you might have about it.
So how does one define Seed Investment?
As the name suggests seed investment means money used as a seed to plant a tree. Normally, it is the very first formal stage of fundraising in which the amount of money, which is raised during the seed investment is the lowest compared to all the subsequent rounds (series A, B and C).
It is also different to 2 other ways of financing a company: bootstrapping and 3F. Bootstrapping means building a company with nothing but a founder’s own savings, while 3F refers to acquiring money from the ones in your close circle. In fact, 3F stands for Friends, Family and Fools, “fools” used here humorously to describe a rather perfunctory investor – something that happens to be a common case in this financing model.
Depending on the size of a startup seed capital can be anything from a few thousand dollars to a few million. This money is never meant to bring profit to the startup owners. It is more of a quick financial aid to startups to cover some operating expenses including accountancy, insurance, rent, salaries to employees, development or some marketing. Most common is the scenario when founders start with Pre-Seed investment to cover development costs and then once their MVP is ready raise Seed investment to start generating profits. Nevertheless, often Seed investment is not sufficient to make companies generate profits.
Many people new to the startup world, wrongly suppose that every startup owner should go through all the investment rounds, that there are. This is entirely wrong. The main goal of every startup is to start generating profit from as few investment rounds as possible. A brilliant idea and quite some luck on top might attract enough investment for the startup to become profitable just from this one round. And this is the most excellent scenario!
Even so, for many startup owners, seed funding is a way to prove to others that their business is “serious” and it has growth potential. The process of getting any investment is normally daunting and difficult. The process of getting seed investment is double that. In fact, seed investment is considered to be the hardest round for attracting money.
The truth is that most of the people highly dislike selling. Finding someone who wants to share his money might really resemble an act of trade. Therefore, as sad as it is, the majority of startup owners do not feel comfortable and confident enough to sell their ideas and quickly give up after a few unsuccessful attempts.
For investors, on the other hand, seed investment is a very risky undertaking. Usually, pre-seed investment occurs when a company still doesn’t have much except an idea and in some cases the MVP. Therefore investors don’t have any certainty that the undertaking will bring them some money in return. (read here what MVP is).
In most cases the only thing that startup owners can offer in return for the money is shares in the startup. But since the company is at a very early development stage, it is a normal practice to offer really large shares for quite a modest amount of money.
There are also a few scenarios when a startup owner could actually be tempted to get a debt instead of equity. Some people are so confident that their startup is the next big thing, that they highly detest the idea of sharing their equity. Therefore, they feel much more comfortable to only pay some interest on top of the money that they borrow.
Where can seed capital be acquired?
Firstly, you should start looking around if there is anyone among your network, who knows anyone, looking for ways to allocate his money. Such a person can be a successful entrepreneur, but he can also be just a regular person who happens to have a lot of savings on his bank account. Once you get their contact information, the simplest way would be to drop them a message on LinkedIn or get engaged in a conversation on Facebook. Since you are reaching out to strangers that still don’t know how excellent your sense of humor is and how professional you are, you need to make sure that their very first impression of you is positive. Therefore your social profile really has to look professional and your pitch deck should be up to date.
If you are not certain that you can do it all by yourself, there are also some platforms, which can help you look for an investor. Take a look here.
On top of it, there are always various startup and business events, at which you can pitch your idea or hook someone at a networking party.
You can also hit some Venture Capital Firms. However, you should be aware of the fact that those companies usually work only with some really unique and extraordinarily promising ideas. Venture capital firms get hundreds of pitch decks on a daily basis, but they invest only in selected few. What is more, they often want to have a high equity, have a say in crucial management decisions and sign really restrictive investment agreements. Not every startup owner is comfortable with that.
Last but not least, you can also register in a Startup Accelerator program. If you qualify for it, it could finance your business on its own or connect you to an investor, who would provide you with some finances.
(Some examples of it would be: ReaktorX, EIT Digital, Y Combinator, and others).
If you have some doubts regarding possible ways to grow your startup, we in Winalife, will be happy to help. We possess knowledge and experience in building and growing startups and therefore will be extremely happy to give you a hand.
Feel free to reach out to us at firstname.lastname@example.org