Humans need air to stay alive. Startup founders need money to revitalize their ideas. So if you are ready to cut off bootstrapping and get hooked on something even more severe, you are prepared to plant your seed. And no, we are not referencing the Cody Chestnutt&The Roots song.
This article is not an ultimate guide to "successful success." But if you have an idea and want to let the whole world know about it, it can give you an outline of your action plan.
The "seed financing" stands for the initial equity funding stage. The initial investment—also known as seed funding—is followed by various rounds, known as Series A, B, and C. After these pit stops, you can take your company public, thus reaching the three magic letters. Oh, we just spoiled the end of the story for you...
These fundraising rounds allow investors to invest money into a growing company in exchange for equity/ownership.
Valuations are defined by various factors, including market size, company potential, current incomes, and management. But let's not get in front of ourselves. Check out our valuation calculator based on the growth rate and profit margin (aka rule of 40), which will help you determine your company's value.
If you read an article on seed funding, you are probably in your pre-seed era. This means you get your operations off the ground using your savings and your friends' money. A good thing, nobody asks for equity. A bad one, nothing lasts forever. Your company is built to move fast if you are a startup.
Once you reach this business point and are ready to ask for big money, install the "sharing is caring" philosophy and embrace your equity funding stage.
This stage gives you hope that with enough revenue, a successful business strategy, as well as the persistence and commitment of investors, the company will eventually grow into a "tree."
At this point, your business gets to sponsor its first steps. After that, you can/want/must invest money into extensive market research and product development. With seed funding, a company has assistance in deciding what its final products will be and who its target demographic is. This funding allows you to employ a founding team to complete the tasks.
In return, you promise an equity or stake percentage; in some cases, it could be a share of later-stage profits.
Depending on your initial idea and the nature of your startup, seed capital can be any amount of money. Our latest Twitter stats show:
They say: "Bigger goals are easier to achieve," well, don't worry too much. It's not unusual for these rounds to earn a startup between $10,000 and $2 million.
Seed capital firms are usually in a position to make larger follow-on investments to increase their equity stake in the company.
As lawyers say, it depends. But most startups operating in the tech industry and its related sectors usually follow this path to grow their business.
Without startup funding, most startups will not make it to the finish line, as most scalable companies go through a phase where they need to burn capital to boost their growth before becoming profitable. A process when a proposed model reincarnates into a fully operational business requires investors and money.
The list of potential investors in seed funding consists of founders, friends, family, incubators, venture capital companies, and more. However, the most common type of investor in seed funding is an "angel investor."
These Angel investors tend to choose more precarious places. They are likely to invest in a company with little way of proven track record. Don't get too excited there. The bigger the risk, the bigger the equity stakes you will exchange for their investment. In the meantime, they will consider the estimated growth trajectory and existing track record, management, market share, and risks.
If you are scared of commitment, the good news is that a seed funding round can be your destination. So imagine you successfully get your company off the ground. You don't have to engage in a Series A round of funding. Most companies raising seed funding are valued at between $3 million and $6 million.
Well, hopefully, you are not scared of clowns. The deal between investors and the startup is mutually advantageous.
The founder&co receive seed capital to develop their operations, and the investor receives an ownership percentage of the business. Think of "giving away" a portion of ownership as a place to get new management insights from the investors who participate in the business decision-making processes. This can help your baby* play in a bigger pool. Also, if you are unfamiliar with the "How do Sergey Brin and Larry Page still have majority voting control in Google?" story, read it to calm your fears.
*a baby analogy, since Fuelfinance founders treat their company as a beloved baby.
When company founders are ready to tell their story and persuade the investors that they have a vision and an opportunity they present is real, prove to them that your product has room for growth. Show the data that will suffice your product's market fit. Know your consumer and deliver a product (or a prototype) that matches their needs.
You may have been looking for a clear answer, but we can only give you a timeline. So choose a timeline with enough evidence to have a strong product, market, or team.
And you might get a chance of being venture-backed. This will back you up in persuading everyone that your company can generate a solid ROI.
You should raise as much money as possible to reach profitability in a perfect world. However, specific types of startups will require a follow-on round, such as that of building hardware. Their target should be to raise as much money as needed for their next "fundable" landmark.
Ideally, you can give up as little as 10% of your company in your seed round. But realistically, most rounds will require up to 20% dilution, and you should try to avoid more than 25%.
In all circumstances, ask for a reasonable amount of money. And what makes it plausible? A plan. Especially several plans with different projected amounts to be raised.
A quick tip:To come up with the optimal amount to raise in the first round, decide how many months of work you want to finance. The most common early employee for tech startups costs about $15 thousand per month. Thus, 18 months of work with an average of five engineers will amount to $1.35 million.
Think of several possible growth scenarios.
Financing options
Just read these articles. Pun intended, it won't be easy.
After these articles, you will be familiar with big words like convertible debt, simple agreements for future equity, etc. Learn more about SAFE&EQUITY. Or hire a digital CFO.
Once an investor says that they are in, you are almost done. Negotiation is an art that cannot be described in one paragraph. It is a combination of rules, luck, protocols, and charisma. Dig deeper into this subject.
Avoid people who are asking for too much due diligence or financials. For example, you should not spend much time developing diligence documents for a seed round.
Create a one-page executive summary, where you will include vision, product, team, location, contact info, market size, and minimum financials, which will be revenue (if you are lucky) and fundraising prior and current. If any.
Graphs, charts, and screenshots say more than words.
If you need someone to hold your hand, request a demo of Fuelfinance. We'll be your trusted guide in the world of finance.
