If you already have a functional prototype and a business plan and you've burned through much of your initial money, then you’re ready to start raising real capital for your startup.
There are several natural questions that come up at this point:
Where can I find the money I need?
Who do I need to hire in my company at this stage?
And how much money should I raise?
We previously explored when to hire your first employee (and who to hire) as you start to think about getting help when you have a great idea and just aren’t sure what to do next.
Let’s fast forward a bit and assume you're firing on all cylinders having made it this far:
You raised some initial money and maybe have a small team developing on your prototype, which is hopefully working to some degree. Your business plan is taking shape, and you have a pretty decent understanding of the market you are pursuing.
When is it time to get serious and raise seed money for your startup? Now.
What is Seed Money?
Seed money, also referred to as seed capital or seed funding, is a private investment of capital in a startup in exchange for equity. Seed money is typically in the tens to hundreds of thousands of dollars range, not millions. This range exists because venture capital firms typically won’t invest less than $1 million, where that might represent the maximum you can expect from seed investors.
Venture capital has some key differences from seed capital, and one of the primary differentiating factors is the amount of money they invest in early-stage startups.
While venture capital rounds can range from $1 million on the low end, up to about $30 million on the high end, seed rounds are typically far less – their purpose is to keep the business afloat until it can independently generate cash flow, demonstrate its value, and acquire more significant funding.
Another key difference is that venture capital investments most often come from institutions while seed funding typically comes from individual investors, such as angel investors, crowdfunding, and even friends and family.
What are Seed Investors?
Seed investors, also referred to as angel investors, are individuals who are looking to invest capital in very early startups. There are likely local groups of these investors in your region or city. You can also look for startup incubators or accelerators, which are groups that might also provide some office space and access to other entrepreneur resources.
Since angel investors will typically reject 75% (or more) of the investment proposals they receive, you want to have your act together before you approach them. Angel investors not only have money, but they often have plenty of experience as well, so if you are able to acquire funding from an angel investor, you’ll instantly improve your chances of success. You better believe investors are going to do everything in their power to get a return on their investment, and they wouldn’t have made the investment in the first place if they didn’t think they could.
Acquiring funding from angels not only gives you some money to help you get to the next stage of growth, but it also lets you know that other more experienced people believe in your idea and that what you’ve built so far has the potential to be successful.
So, how much seed money should you try to raise at this stage? To answer that, it helps to understand what a “seed round” really is.
What is a Seed Round?
A seed round is typically a very first and small round of startup funding that allows you to hire a few key people and get your project to a demonstrable stage with a prototype. In some cases, a small seed round can be used to get your business plan completely written. If you need a steady income while developing your idea, seed capital can also provide this.
A friends and family round or funding from other initial money sources usually provide you with capital in the tens-of-thousands of dollars range, which is just enough to get you started. Seed capital, on the other hand, is typically enough to get you to a venture capital raise such as your Series A round, but rarely enough to get you all the way to market.
So, most often, a seed round will result in investments that are more than a friends and family round but less than a venture capital round.
It can also be pretty expensive in terms of the equity you have to give up in order to get seed money, so don’t raise more than you think you need to get to Series A – and be very frugal in how you spend it.