We’ve written these words before but they’re worth repeating: the success of your startup takes more than just a clever idea or working product. Launching — and eventually scaling — a business requires money. Sometimes lots of it.
For most companies, that kind of capital is raised through various rounds of funding. The seed funding round has the potential to turn hopes and dreams into reality. At the same time, poor execution at this stage can be catastrophic.
Good news: catastrophes are easier to avoid when the steps are clear — when forward progress has a plan, and potential pitfalls are wrapped in caution tape. That’s our goal here: to provide a practical, how-to guide for understanding seed funding.
What Is Seed Funding?
First of all, let’s clarify what seed funding is not. Seed funding isn’t a loan. Instead, it’s an opportunity for investors to exchange funding for an ownership stake in your company, a share of the profits from your business, or both.
Why Do Startups Need Seed Funding?
Seed funding is what allows your startup to:
- Hire more people
- Expand into other markets
- Increase production
- Invest in better equipment
- Enhance your technology
- …and so much more
Seed funding is also a precursor to venture funding, where dollar amounts become larger and a company’s footprint has the ability to grow exponentially.
Seed Funding Breakdown: Where Does the Money Come From?
Seed funding can come from a variety of sources. Here are some of the most common:
1. Incubators and Accelerators
For early-stage startups, incubators can be an initial source of seed funding.
Of course, incubators are primarily known for nurturing innovation and helping generate ideas, but small investments are often one aspect of their strategy as well.
The investment aspect is especially true for accelerators because growth is their primary focus. With set funding amounts available in exchange for a percentage of your company’s equity, acceptance into an accelerator program can provide a quick infusion of cash.
In both scenarios, additional help — like tech support, access to shared workspaces, and mentorship — is often available.
2. Crowdfunding Platforms
Although crowdfunding is still relatively new, its growth and popularity are steadily increasing. With multiple platforms to choose from (including some that are industry-specific, like RedCrow), seed funding via the crowd — from everyday people to business leaders — has the potential to bring in significant amounts of money.
It’s important, of course, to understand the terms upfront. Not only do you need to know what you’re required to give in exchange for the capital, but you’ll want to understand what fees the platform charges too.
3. Angel Investors
Let’s clarify something up top: For many startup founders, finding an angel investor might feel like the dream. In reality, it might simply be a piece of the puzzle. Angel investors can quickly infuse cash into your business — money that has the ability to solve many of your financial headaches. That’s welcome news.
But angel investors are not a must-have. They are nice to get on board, but they are not a requirement.
Bottom line: angel investors are individuals with a high net worth who exchange seed funding (and sometimes venture capital) for a percentage of ownership in your company. Angel investors receive pitches, decide who they’d like to meet with, and control the terms of the deal from start to finish. Before working with an angel investor, make sure you understand those terms and are happy with the deal you make.
That’s right. Large corporations — think Apple, Google, etc. — often provide seed funding to startups, especially if the product or idea is within their interest or industry. Even if it seems like a long shot, remember that a multifaceted approach to seed funding tends to be the most successful. Don’t hesitate to reach out to corporations you think might be a good fit.
5. Personal Savings
Finally, many startup founders will use personal savings as a way to get their business off the ground. Frequently referred to as “bootstrapping,” the idea includes upsides and downsides.
The upsides are simple but effective: using your own money doesn’t come with equity tradeoffs, interest, or repayment.
The biggest downside is that bootstrapping might make increase financial pressure on the founder or founders.
6. Bank Loans
A personal or small business loan may be another effective way to gain some seed funding. In most cases, this type of loan will require some form of collateral and will include interest and a schedule for repayment. Still, options exist, and traditional banks or credit unions can be an additional source of funding.
How to Get Seed Funding for Your Startup
With all of these possible sources of funding, you may feel a little overwhelmed. You know your startup needs funding, and you have an idea of where that funding comes from, but you may be less sure how to get it. This is a legitimate concern, but we’re going to walk you through some steps.
Step 1: Attract the attention of investors
That may seem easier said than done, but it may not be as hard as it sounds. Here are a few concrete ways to increase the chances that an investor will find you:
- Network — in-person and online
- Attend conferences specific to your industry or area of interest
- Get active on social media
Step 2: Learn how to talk about your company
If you think you already know your talking points, keep reading anyway. This idea might be new to you.
To engage your audience and have them wanting to know more, your product or idea needs to be known for solving a problem. What is that problem, and who does it impact? When you talk about your company, it’s important to start there — with the problem you solve.
After that, you need a clear way to introduce your company — the very thing you’ve come up with to solve the problem you just mentioned. How does your startup address that problem? Use simple language and keep it short.
Finally, what’s the payoff for someone who uses your product? In other words, with their problem now solved, how does life — in both big and small ways — improve?
When you learn to talk about your company in this way, you accomplish two things: you begin to effectively engage your audience, and you learn how to compel them to act. When you’re speaking to investors, the action you’re asking them to take is funding-related. With that in mind, they may have some immediate follow-up questions.
Step 3: Learn how to share your data
If the story of your company is what engages and compels, the data is what supports that overall narrative. When we talk about those numbers, they need to include the following:
- Your business plan
- Real and/or projected costs, revenue, and growth potential
- The amount of funding you need
- How that funding will be utilized and what it will produce
- Strengths and weaknesses
- Future opportunities and potential threats
When you’re speaking with an investor, you need to paint a picture of where your business fits into — or even potentially disrupts — the market.
Knowing How Much Seed Funding to Ask For
Determining how much seed funding you need is critical, and this easy-to-follow formula can help you do the math.
Multiply your current monthly costs by the number of months you’ve projected to get your business off the ground. Once you have that number, add a reasonable percentage to account for unexpected issues like delays and/or increased costs of materials or services.
Here’s the bottom line: the amount of seed funding you’re able to generate will depend on the value of your company — even if that value is initially based on projections. Over time, that value will shift to things like assets and intellectual property. Either way, you cannot effectively ask for funding that exceeds the value of your business.
Knowing the Right Time to Raise Seed Funding
As with most things, the success of your seed funding will depend largely on timing. If you try to raise funds preemptively, you may not have all the pieces in place to attract investors. Here’s a checklist that will help you. Once you’re able to answer “yes” to the following questions, you’re ready to raise seed money in a way that’s sustainable and beneficial to the life of your business.
- Do you have a minimum viable product (MVP)?
- Can you demonstrate that your product or idea works and that a market for it exists?
- Is there evidence of interest in your product — ideally revenue, but also users, followers, signups, etc.?
- Are key personnel in place and capable of driving growth?
Seed Funding Essentials: The Power of the Pitch Deck
Your responsibilities as a startup founder are extensive, and they aren’t limited to raising funding. Securing the capital you need is important, but in the day-to-day life of your company, so are countless other things. The reality is that you can only do one thing at a time — at least if you’re trying to do it well. And while you may not be able to clone yourself, you can duplicate your efforts. That’s what a pitch deck is for.
Meeting with every potential investor face-to-face would be wonderful if it were possible, but there aren’t enough hours in the day. A high-quality, comprehensive, and interactive pitch presentation puts you in the room with your intended audience. There’s only problem: Not every pitch deck can pull this off. In fact, most can’t. They’re one-dimensional slide shows that fail to engage or compel their audience. You deserve better, and so do they.
If you’re having second thoughts about your own pitch deck, we can help turn things around. At The Main Stage, we’ll help you craft the kind of story that resonates with potential investors — blending engaging graphic content with compelling video features that allow you to demonstrate your product or idea. On The Main Stage, you’ll bring your story to life in ways that let you stand out from the crowd of one-size-fits-all pitches. We call it the future of fundraising because it is!
Creating Your Investor List — Here’s How
Here’s a bit of advice: start where you are, and with who you know. You may not be personally acquainted with Mark Cuban. That’s okay. You probably know another founder, small business owner, or entrepreneur. Buy them a cup of coffee and spend a few minutes asking questions. They’ve probably been in your shoes and may be able to point you in the right direction.
The startup incubators and accelerators we mentioned earlier can be helpful too. These programs can be a natural on-ramp to networking events and mentorship opportunities, and provide direct access to interested investors. Even online platforms like LinkedIn can be excellent starting points for putting a list of potential investors together.
Here are a few pieces of homework to do as you build your list:
- Do the people on your list have a track record of investing in startups in your industry and location?
- Can they offer additional guidance — like practical advice or industry expertise?
- How have their previous relationships with founders typically developed, and were those founders satisfied with how the relationship played out or ended?
- Did these same investors participate in additional funding rounds?
Working through these questions will help you target the investors best suited for the needs and wants of your startup. You shouldn’t be prepared to accept money from just anyone, especially when equity in your business is up for grabs. The investors you work with need to be people you like, trust, and respect. Investors choose your business, but you are also choosing them when you agree to the terms of a deal. Here are five questions to ask yourself when making that decision.
Five Steps for Choosing the Right Investors
- Do I want a hands-on investor who’s actively involved, or would I prefer someone who stays in the background?
- Have their previous investments been successful, and if so, how long did success take?
- Do I have a funding goal and is it clearly stated in my business plan?
- Can the investors on my list offer help beyond funding?
- Is each potential investor a good fit for my business?
The Importance of Managing Equity During Seed Funding for Startups
As your seed funding round takes shape, one thing is sure to happen: you will begin to give up equity in your startup. The thing that was once 100% yours — or at least belonged to you and one or more co-founders — will soon belong to other people too.
Before this happens, it’s crucial that you have a capitalization table (also known as a cap table) in place.
A working cap table should include all of your company’s equity ownership, which you’ll need in order to calculate market value. Your cap table will also need to include total funding amounts received since inception, ownership shares, and share prices. If an organizational chart illustrates personnel power in your business, a cap table demonstrates the financial power of your business.
Depending on the needs of your startup, gaining the seed funding you need can be a challenge. That said, we think you’re up for it. Having a plan in place makes a huge difference, and who you decide to partner with when the time comes is just as important.
We want to help you prepare to thrive. You deserve to tell your story in a way that inspires confidence and builds curiosity. That’s hard to do when your presentation looks like everyone else’s. We’ll help your harness the power of your who your company is and how it’s different.
Beyond our exclusive StoryVault™ platform, The Main Stage includes a powerful CRM system that allows you to track investor interest and tailor specific follow-up communication all with the click of a button. And when it’s time to close the deal and receive your funding, our Document Vault is a secure storage solution for investor correspondence and compliance.
Attracting the right investors can be tricky, but we make it easier. Click here to start your free 14-Day trial and see for yourself what The Main Stage can do for you!
Aishlin Harrison is the co-founder of The Main Stage, as well as an artist, musician, and passionate entrepreneur. In addition to these roles, she serves as The Director of Operations and Marketing for RedCrow™, Inc., a direct investment and marketing platform for healthcare companies. You can connect with her on LinkedIn.