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Do you have a minimum viable product (MVP) ready for ???? launch? If you do, then your next step would be to look for investors to fund it.
Often, MVPs do not make it to the market because of the lack of funding. No matter how much potential your product or service has. Don’t be complacent as a startup. Be proactive in searching for investors. The earlier you can secure capital to fund your business, the faster you can propel your MVP to success.
There are five stages of venture capital funding that MVP startups and businesses go through. These are the seed stage, startup stage, early stage, expansion stage, and finally, the bridge stage.
In this article, we’ll dive deep into how funding at the seed stage works.
What is Seed Funding for Startups
Seed funding is the first official round of funding that a startup business or venture goes through. Like a seed, your MVP needs resources to survive, grow, and eventually thrive in the field. Therefore, your seed funding should be enough to sustain the operation needs of your MVP until the next round of funding.
How Does Seed Funding Work
In the initial stages of the startup or business, it is critical that the MVP earns enough revenue to finance the operations. However, the developers must also keep thinking ???? of ways to improve. These include conducting market research and product development that will require capital resources.
This is where seed funding comes in. An investor gives you seed money to spend on developmental activities. So, on top of whatever amount of money you and your co-founders have pooled in by yourselves, you get to have some more to cushion the blow of failed trials along the way.
Types of Seed Funding
If you’re at the initial stages of the MVP, then chances are major investors won’t know about you yet. That’s natural. So, where do you go to ask for seed funding? Here are the types of seed funding for startups that you might be interested in checking out.
- Corporate seed funds
- Angel Investors
- Personal savings
- Debt Funding
- Convertible Securities
- Venture Capital Funding
- Angel Funds or Angel Networks
Angel investors are private individuals who have high net-worths. They’re considered angels because they use their resources to fund startups and fly off the ground. We also recommend that you listen to the Angel Podcast to know more about angel investors and what criteria they use in selecting which MVPs to fund.
As the founder, you will be the pre-seed funder of your MVP during the ideation and trial-and-error phase. It is during this starting stage when you normally use up personal resources and shoulder all the necessary expenses until your product is ready for launch.
While pre-seed funding is not an official round of funding, it is still essential. Aside from you and your co-founders, you can choose to seek financial help from your closest circle of friends, family, and relatives. This in turn also makes them pre-seed funders.
Pre-seed funding gives your MVP a head start in the race to success ????. The amount you pool here dictates how far you can go with your MVP before you participate in the seed stage. Some MVPs run out of resources at this stage, and consequently, fail to get official equity funding.
Seed funding is the next stage. It is essentially an agreement between startup founders and investors. The investor agrees to fund your product in exchange for usually 10 to 25 percent equity or share in your company.
As for the amount of money investors decide to put into your business, it will depend on how well you are able to present your MVP and team in your pitch. It can range anywhere from ten thousand dollars to millions of dollars, especially if your company turns out to be a unicorn.
Unicorn startups are highly valued by investors because of the projected revenue that they can generate, their strategy, and the powerful team behind it all. The value could also be attributed to the impressive quality and note-worthy capability of the MVP that is showcased to the investors.
Series A Funding
The first round of seed funding is the series A funding. Here, a startup should be able to present a strong ???? strategy for their MVP to generate revenue. Prepare a plan to transform the MVP into a money-making business to make it more appealing to investors.
Participant investors in the Series A funding usually come from traditional venture capital funding agencies. In this round, startups who pitch their businesses are valued at around $21.5 million on average, as of October 29, 2021.
While angel investors also participate in this funding stage, they don’t have the upper hand against the venture capital funding agencies. During the series A funding, startups become more political in choosing their first investors.
The first investor serves as the anchor of the startup. If another investor gets wind that a specific venture capitalist wants to put money into your MVP, they might also become interested and present you with an offer of their own.
Some startups may not be interested in joining this round of funding. If their startups take off the ground even with just the seed funding, they’ll already feel accomplished. But series A funding can give startups a seriously substantial amount of money for their MVPs.
If you’re interested, here’s how to get a series A funding:
- Join an accelerator
- Leverage your network
- Extend and nurture your network
Series B Funding
After you have successfully secured resources from series A, you’ll need to showcase all of your achievements in your portfolio for the series B funding. With all the funding you’ve received, how much further were you able to develop your MVP? And what more can you offer the investors in the Series B funding?
This is why series B funding is the most challenging. The pressure to scale up is immense, and the stakes are high for both the startup owners and the investors. For this reason, not many startups proceed to this stage of funding.
In June 2020, the average amount for the series B funding was $33 million. That’s 10 million dollars more than the average amount for series A. No wonder it’s even harder to secure funding at this stage.
Series C Funding
If you’ve reached the point of success where your MVP is priced above the resistance, or below the support area of funding, then you can be considered a breakout company. In this case, you might want to consider participating in Series C funding.
Series C funding is the first of many later-stage investments for startups. The gameplay ???? is to find investors who are interested in acquiring your company and scaling it up for a wider public offering.
As you might expect, the average amount for series C funding is much higher than the previous series at $59 million as of June of 2020. This is more than twice the value for the series A funding in October 2021.
What is Seed Money?
Seed money, seed capital, or seed funding is the amount of capital that startups can use to keep their MVP in business until they can fend off the economical factors for themselves.
Since seed money comes from individual investors and not from traditional venture capital funding companies, the amount is significantly lower. Nonetheless, it will be enough for most startups in the initial stages.
Importance of Seed Money
Securing a good, hefty amount of seed money is something you’d want to put the most effort into after producing your MVP. ✊
If you’re able to get more than what you’ve estimated, you’ll have more cushion to fall back on when product development results turn awry. So, the more seed money you have, the stronger foundation you can build for your MVP.
Why You Should Use Seed Money
The seed money that your investors give you in exchange for company shares is intended to keep your MVP intact while you look for brighter opportunities. But once you have it, you should be ready to accept that you’re no longer going to be the sole decision maker in matters relating to your MVP. There will be more pressure to improve and progress because your investors will be rooting for you to succeed, and they can easily pull out their shares if you don’t put the seed money into good use.
Speaking of, here’s a list of what seed money is usually used for:
- Continuous improvement and product development
- Market research
- Hiring new team members
- Procuring new facilities and equipment
- Pilot-scale production and distribution
Downsides of Seed Money
Seed money is a great help for starters who don’t have a financial cushion to support their MVP. But for some startups, seed money may hamper their team from moving forward in the race ???? instead.
Here are some of the downsides of seed money that you should be aware of.
- When you give equity to investors, you also give them a say on how to run your startup.
- When you’ve used up all the seed money, you may have to borrow more from your investors, who may or may not ask for immediate returns. This borrowed money could also be tallied as debt that you’ll eventually need to pay off.
- If your seed money comes from your closest circle and they give you different amounts, you might encounter a dispute over how much return of investment your investors are entitled to once your MVP hits the ground running.
- Once you become a company with investors, you’ll belong to a different business category which also entails costs of regulatory compliance.
Public vs. Private Seed Money
Seed money can be categorized depending on who gave the investment.
Public seed money comes from institutional investors. You can get this type by issuing an Initial Public Offering or IPO. On the other hand, private seed money comes from private individuals like Angel investors. Bank loans are also considered as sources of private seed money, although this specific option is not very popular.
How to Get Seed Money
No one will invest money in you if you don’t show them that you know how to manage that money ????. If you can, keep a file of your previous financial statements for reference.
If you’re to get seed money, you should:
- Have a business plan included in your pitch
- Have a comprehensive procurement and expenditure plan for the money you’re asking for
- Have a legally binding document ready to prevent disputes in money and equity
Showing investors that you’re ready to take responsibility for your actions and the money that you’ll be receiving will increase your chances of getting into their good graces.
Stages of Venture Capital Investment
A startup is a venture that needs a capital investment to grow and prosper. We’ve touched on the seed stage of a venture capital investment, but that’s just the first of five stages. The rest are described in a nutshell below.
- Seed Stage
As you know, this stage is akin to planting your MVP in the vast field of already available products in the market. Here, the major selling point is your MVP and its capabilities. If your product isn’t able to attract and secure an investor, it’s chances of getting planted are slimmer, and it’ll be harder to kick off from the ground.
If you pass the seed stage, it means that your MVP works and that investors are interested to know more about what it can do. At this point, you move to the start-up stage where you fine-tune tasks before finally making your MVP commercially available.
- Early Stage
The early stage covers both the first and second stages where startups conduct pilot test runs for commercial production. Here, you can increase the volume being produced and conduct more marketing for your startup. This is the first official stage of your venture capital, as the first two are more like preliminary steps.
- Expansion Stage Capital
As the name suggests, this stage is all about expanding your MVP, which you can start producing at a commercial level. There will be more of everything here in terms of funding, target markers, diversification, and differentiation. Even problems are greater at this stage! This is where the real test happens. If your MVP is fine-tuned enough to withstand all the internal and external pressures of the economy, then you’ve a higher chance of earning even more profit in the long run.
- Bridge Stage
By the time you reach the bridge stage, your MVP should already have suitable ???? traction in the market. It must also have left an impression on the consumers and investors alike. With these achievements come more opportunities such as mergers, acquisitions, and price reductions. Once you clear this stage, you graduate from being a startup to a fully-fledged marketable business. Some investors and market players also refer to this stage as the mezzanine or pre-IPO stage.
You Might Ask
How does seed money work?
Seed money works by giving you the initial funding you’ll need to make your MVP grow. First, do your best to make an awesome and potentially income-generating MVP, then pitch it to investors. Once you’ve attracted an investor, they can give you seed money to fund your MVP’s operations. In return, you must give them some equity or shares in your company.
How do seed investors make money?
A seed investor can make money in four ways. First, when the startup they funded sells to another company. Second, when the startup successfully issues an initial public offering and goes public. Third, when the startup booms and earns great profits. And fourth, if the seed investor sells his or her company shares to others.
Does seed funding need to be paid back?
It depends on what type of seed funding you chose. If you opt for the debt funding, you should return the amount you borrowed plus possible interest. But if you chose equity funding, then you don’t have to pay the money back. However, if you want to get your company shares back, you need to buy from your seed investors.
What is considered early-stage VC?
Your company in the development phase is considered an early-stage venture capital. In the development phase, startup founders might be already conducting market research and thinking of ways to add more value to their MVPs. Basically, if you already have an MVP and you’re doing improvements on it, then you are in the development phase.
What is early-stage funding?
Early-stage funding covers the first three stages of venture capital. These are the seed stage, the startup stage, and the first stage.
What is the disadvantage of venture capital?
A venture capital funding is higher than the seed stage funding. This entails more paperwork, more regulations, and more requirements. You’ll also need more time and effort for a venture capital investment to push through.
Developing an MVP can be costly, but pushing it to enter the market is even more so. This is where investors come in. You can meet more of them if you join Series A, B, C, and other funding rounds, and if you’re able to pitch your MVP well during the seed funding round. So, plan your pitch carefully and really sell it, but don’t go overboard and make promises you can’t deliver.
Once you do get seed funding, budget it accordingly to fit into your plans and schedules. Otherwise, your MVP might not go very far from the starting line.
We know there’s a lot of information to digest from this article. But we hope that your newfound knowledge ???? can help calm your nerves when you’re about to pitch your MVP to your future investors. Just believe in yourself, your team, and your product. The rest will follow!