The Startup India Initiative was launched by the Government in 2016 with an aim to boost the startup culture and encourage entrepreneurship in India. In just over half a decade India’s startup ecosystem has grown immensely with over thousands of innovative new ventures today. Consider this: the number of startups increased from 29,000 in 2014 to 55,000 by the end of 2020. In the same period overall funding skyrocketed to touch $63billion. This speaks about the success of the startup culture in India.
Capital or raising funds plays a crucial role in the functioning of any startup. For a startup, fundraising happens in different stages. This again depends on the stage in which the startup is in.
What is Seed Funding?
A startup has various life stages which is similar to a plant. Just as we need to care and water a seed so that it sprouts into a plant, a startup too needs to be nurtured with money in its initial stages so that it starts growing. The funding done at the nascent of the startup is called Seed Funding. Seed Funding is the capital invested in a startup company by an investor during its early stage. This investment can be in exchange for an equity stake or a convertible note stake. Thus, seed funding is the first official money than an enterprise raises.
The seed funds works as an initial capital and could be used for initial stage operations and product development. Seed funding gives the startup access to working capital and get things off the ground. It can thus be concluded that seed funding is an important process that lays a strong foundation for a successful startup.
Is Seed Funding Risky?
Yes, seed funding is risky from the point of view of both the founders of the startup and the potential investors.
The startup is still in its ideation stage at this juncture when it is raising seed funds. The potential investors do not have much information about it and are mainly taking a bet on the success of the idea. The founders have to convince the investors about the viability of the idea.
The founders also should raise seed funding only after assessing the risk and requirement. This is because a certain amount of equity or ownership of the company has to be given up when funds are raised each time at this stage. The founder will have less control over the business when there are more co-owners.
Sources of Seed Funding for Startups
Founders put in their own personal savings and there is no outside funding in bootstrapping. Borrowing money from friends and family is also included in bootstrapping. There is no pressure on the founders to return borrowed money or no equity is given away in this method. While the entire risk of the business is on the entrepreneur, he has complete ownership and control of the business as no equity is given away in this method.
Incubators nurture the startups during the beginning phase of the startup. They provide small seed investment and also mentorship allowing the startup to prototype and build their product. They offer office space and help the startup grow from idea stage to prototype stage. Many of the incubators do not take an equity stake in the company but provide support beyond funding.
Unlike incubators who back and nurture early-stage innovation, accelerators “accelerate” the growth of the startup. Their goal is to grow the size and value of the company as fast as possible. Accelerators also provide professional services and mentoring besides the small seed investments. Accelerators are bound by time and tend to provide training to the entrepreneurs from a few weeks to a few months.
- Micro Venture Capital
Micro venture capital is the seed funding providing to startups in the early stages. The amount of finance provided is less than the funds invested by typical venture capitalists.
- Corporate Seed Funds
Big Companies and Tech giants also invest seed capital in startups if the idea seems prospective. This source of funding, called corporate seed funding, gives good recognition for the startup and it is possible that the startup may be acquired by the company going ahead.
With over 500 crowdfunding platforms today, this has become one of the most popular avenues of raising seed capital. Anyone can display a business idea or product on these platforms and raise small amounts of money from friends, family, customers and individual investors.
- Angel Funds
In this method, small investors join to form angel networks and invest small amounts in the startup in it early stage. Popular Angel networks in India are Lead Angels, AngelList, Indian Angel Network, etc.
- International Philanthropic Impact Investors
When a startup addresses a social issue, it can approach international philanthropic impact investors to raise seed funds. Such investors provide funds as part of their philanthropic activities and not for any business dealing. In recent years, many social ventures have accumulated seed funding through this source.
A startup is dependent on seed funding to get things moving. Investment firms too are on the lookout for unique, practical and fabulous business ideas. The opportunities for raising seed funds is thus huge for the startups.