Seed funding - Funding stage #2
Reshma Kanase | Sept. 5, 2020, 4:17 a.m.
Seed funding can be compared to watering capital to your startup and the way one nurtures the tiny plantlet till and after it blooms into a huge evergreen tree/forest.
Seed funding is the capital an entrepreneur obtains from investors/institutes in exchange for equity, at the initial stage of a startup or later stage, for scaling up or diversifying the business. If a founder is not willing to share equity and has sufficient capital to run his business, then it is called the bootstrapping/ pre-seed funding stage. Bootstrapping can also be an option to seed funding. Then the seed funding stage is followed by Venture capital - Series A, Series B, Series C, and so on. In these series, the investors provide capital in exchange for equity, but the only difference in them is that the demands and expectations rise with the series.
A founder may require to raise outside funds in the early days of the startup or after months or even after many years of the startup or never. A founder needs to sit and think upon it, whether external funds are required immediately or will be required in later stages. The founder has to consider all possibilities of success and failure and has to plan and decide everything accordingly.
ADVANTAGES :
1. Seed funding helps an aspiring entrepreneur to start before having any personal finance available.
2. More capital available for product development and other expenses.
3. More resources are available, therefore it is easier for the founder to scale up or diversify his business, and also the growth rate can increase faster.
4. If huge profits are not made by the company in the initial stages or if an entrepreneur runs out of cash his business won’t fail, since the founder can manage to reinvest from the obtained funds.
5. A venture capitalist or funding agency provides connections with experts in different fields and more recognition to products, and also their expertise indeed helps a lot. Better ideas provided by investors can help the business to grow faster.
6. By complying with the advice of professional investors can reduce the risk or problems caused due to the inexperience of teenage entrepreneurs.
DISADVANTAGES :
1. Personal finance may be, used with outside capital raised for the enterprise, which makes a huge sum of money together, which puts more responsibility and pressure on the founder.
2. Finance of other entities is also involved, then from the profits is not entirely of the founder; or have to share the profit.
3. The founder has pressure since he is answerable to investors.
4. The founder has to consider the investor opinions and decisions for product development or over any other issues about the enterprise.
5. Huge capital is available, so the entrepreneur might become carefree and spend more unnecessarily.
6. Huge capital -> huge investment ->huge loss-> huge debts. So the founder has to be very careful with capital allocation to the essentials of the enterprise.
7. Time and energy consumed in finding financial assistance and convincing investors.
8. Also, the time consumed in completing training programs provided by funding institutes.
Seed funding sources can be categorized into equity-based seed funding and non-equity based seed funding. This blog consists, most of the non equity seed funding options.
Non-Equity Based Seed funding options :
Personal Finance:An entrepreneur can use his savings or gets capital from family, close friends, close relatives. This is preferred over other options as family and friends may not charge interest over funds provided, this is also known as bootstrapping.
Debt Funding: It includes loans provided by the bank, money borrowed from family and friends, on which interest is charged depending on the rate of interest.
Government schemes: Many countries provide seed funding to accelerate startups. Example: Startup India, Make in India, Mudra of India, SBIR, and STTR of U.S., BRII (Business Research Innovation Initiative) of Australia.
OurFeatured storiesandCurated newsshow how these featured teens funded their startups. Those are the real case studies that you can explore from our website, and learn and get inspired through them.
References :
1.Qadir, Rawaz. (2020). Small Businesses in Developing Markets Funding Options & Reasons Research Paper Essay. 10.13140/RG.2.2.24770.20167.
Related:Bootstrapping-Startup stage#1
