Seed Funding for Startups: A 101 Guide
This seed funding guide for startups will help you get started with this funding round. Learn when and how to raise seed funding.
What Is seed funding?
Seed funding is generally the earliest form of capital a startup will raise. In our post, Startup Funding Stages, we define seed funding as:
“Seed funding is a startup’s earliest funding stage. Often, seed funding comes from angel investors, friends and family members, and the original company founders. An early stage startup may also look for funding through bank loans, but angel investments are usually preferred. Seed funding is used to start the company itself, and consequently it is fairly high risk: the company has not yet proven itself within the market. There are many angel investors that specifically focus on seed funding opportunities, because it allows them to purchase a part of the company’s equity when the company is at its lowest valuation.”
Seed funding is integral to getting ideas off the ground and giving a potential company and idea life.
What is the purpose of seed funding?
The purpose of seed funding is simple. It is intended to give a founding team enough capital to pursue a certain idea or market to prove if the concept works. Different investors may have different requirements for a seed stage company but generally they are pursuing “product-market fit.” As Marc Andreessen, Founder of Andreessen Horowitz, defines it, “Product/market fit means being in a good market with a product that can satisfy that market.”
Seed size rounds are exploding in size and the purpose may be vary quite a bit from company to company and investor to investor.
What is the difference between Seed vs. Series A funding?
Series A funding is the next jump in a company’s funding lifecycle. In a seed round is the first capital into a business, a “Series A” is generally the next round of capital. As we defined in our Startup Funding Stages post, Series A funding is:
“When a company is first founded, stock options are generally sold to the company’s founders, those close to them, and angel investors. After this, a preferred stock can be sold to investors in the form of a Series A. Series A allows investors to get in early with a business that they truly believe in. It’s a mutually beneficial relationship for both the company and the future stock holders.”
When a company reaches their “Series A” they likely have product-market fit and are ready to scale their business to a $1M or more in revenue. At the Series A you likely have solid revenue in a place and a scaleable plan to bring on more customer sand revenue where at the seed round you may have little to no revenue.
A seed round is used to demonstrate your product, service, or team can seize a market. A series A round is used to scale the product, service, or team to attack and scale in your market (or a new market).
When is it the right time to raise seed funding?
The timing to raise seed funding for a startup can be tricky. First and foremost you should approach seed investors when you believe you have a strong enough product, market, or team (or combination of those) to build a company that deserves to be venture backed. This means that you can scale and grow to the valuations where an investor can generate a solid return on your company.
As the team at Y Combinator writes, “Founders should raise money when they have figured out what the market opportunity is and who the customer is, and when they have delivered a product that matches their needs and is being adopted at an interestingly rapid rate. How rapid is interesting? This depends, but a rate of 10% per week for several weeks is impressive. And to raise money founders need to impress. For founders who can convince investors without these things, congratulations. For everyone else, work on your product and talk to your users.”
If you believe that your business has what it takes to generate massive returns for an investor, it is likely time to start your fundraising process.
How to raise seed funding
The key to successfully raising a seed round is to have a system and process in place to raise capital. Just as you have a systematic approach to your sales and marketing funnel the same should be done for your fundraising efforts.
When it comes to fundraising, we like to think of it as similar to a traditional sales and marketing funnel for a B2B enterprise business. In its simplest form, a traditional sales & marketing process can be broken into 3 steps:
- Attracting and adding qualified leads to your top of the funnel on a regular basis.
- Nurturing and moving the leads from through the funnel with the goal of closing them as a customer. (aka get them into a buying process)
- Serving customers and creating a great experience until they become evangelists or promoters.
You can convert those same ideas into a “Fundraising Funnel” that looks something like this:
- Filling the top of your funnel with qualified potential investors. These investors generally come from cold outreach, warm introductions, or inbound interest. You want to make sure these fit your “ideal investor persona” — right sector, stage, geography, check size, etc.
- Nurturing and moving investors through your funnel. While you may not be actively trying to close new investors and add capital you should constantly be working the top of your funnel. Staying fresh on the mind of potential investors 365 days a year using traditional marketing tactics will pay dividends when it’s time to pull the string on a new round of capital. Pro tip: send them a lite version of your quarterly investor update.
- Building relationships and communicating with your current investors. Customer success is key to maintaining a strong relationship with customers once they reach the bottom of the funnel. The same can be said for your investor funnel. As a founder, one of the first places to look for capital is current investors. One of the first places a new investor will look to for guidance will also be your current investors. At the end of the day your current investors should be the ultimate evangelist for your business.
Just like a standard B2B sales process, you need to have “leads” (read: investors) coming to the top of your funnel so you can move them through the funnel to ultimately close them (read: close your round).
To get started, you need to understand who the right investor is for your business and how you fit into their greater vision and can be of benefit to them (more on this below).
How Much Seed Funding To Raise?
Deciding how much seed funding you should raise is entirely up to you, the founder. As a general rule of thumb you should raise enough to reach profitability or to the point where you can easily reach your next “funding milestone.” This can be a revenue number, user benchmark, etc. but generally speaking should be within 12-18 months.
To model this you need to have a thorough understanding of how your business functions and what it will take to get to the next milestone. Understand how much it cost to acquire a new customer, retain a customer, how much an engineer costs, salesperson, etc. To help, you can check out our popular financial modeling tools here.
Types of Seed Funding for Startups
There are a few types of seed funding. For the sake of this post we will mostly talk about raising venture capital but to cover off on a few other options:
Friends & Family
One of the most common sources of seed funding comes from friends and families. This often follows a similar approach to the funnel discussed above but likely less intensive as you, the founder, likely have an existing relationship with this group. Keep in mind that you are investing their capital in a highly risky asset class and they need to be made aware of this situation.
Another form of “seed funding” that is becoming more popular is crowd funding. Sites like Republic and StartEngine allow startups to raise equity rounds from individuals so check sizes can be as little as $100.
More firms are coming out with new financial instruments to offer as an alternative to venture capital. Earnest Capital is one of our favorites. Earnest Capital provides early-stage funding, resources and a network of experienced advisors to founders building sustainable profitable businesses. Earnest Capital uses their own financing instrument called a Shared Earnings Agreement (SEAL). Check out other non-traditional investment funds here.
How to choose investors for seed funding
Once you have defined what your ideal investor looks like it is time to start researching, finding, and contacting them. To find the right investors we suggest browsing different databases and networks to find your perfect fit.
You may already have investors in mind or have networked with investors in the past — awesome start! If you want to continue to find investors, Visible Connect is our free database built by founders, for founders. Visible Connect allows founders to find active investors using the fields we have found most valuable (like check size, geography, traction metrics, etc.).
As you begin to browse and find investors for your startup, we suggest keeping tabs on them. You most likely have an involved CRM or process to keep tabs on your current and potential customers. Should the same be true for your investors? This can be in the Visible Fundraising CRM (you can add investors directly from Connect into the CRM) or a simple Google Sheet. No matter what you decide, make sure you have a system in place to track and monitor conversations to make your life easier moving forward.
Building Your Investor List
As you start to build your list of potential investors — we suggest breaking it down into 3 “tiers” — Tier 1, Tier 2, and Tier 3. Tier 1 are the firms you believe to be most qualified, followed by tier 2 and 3.
We highly encourage taking on these investors in “sets.” This means grouping investors in sets of ~5 (suggest trying to keep sets to 5 investors or less) so you have the opportunity to better evaluate and tailor your pitch as you move through your sets.
As a rule of thumb, you’ll want to make sure you mix in Tier 1, 2, and 3 investors in each “set.” For example, if you pitch all of the Tier 1 investors in the first set, you’ll potentially miss an opportunity to tailor your pitch and only be left with less qualified (Tier 2 and 3) investors.
Additional seed funding resources
There are hundreds of resources out there to help you raise your seed round. At the end of the day the more entrepreneurs that raise capital the better the startup ecosystem does as a whole. At Visible, we do our best to curate and write the best resources to improve a founders chances of success.
Here are a few of our favorite resources to help founders improve their odds of raising venture capital:
Our in-depth guide covering all things related to the startup funding lifecycle. Understand what it takes to go from seed stage funding to Series A and later.
Templates and resources to help you build your first financial model for your startup. In order to improve your odds of raising capital you need to understand the ins and outs of your business.
Tips and best practices for using investor updates to leverage your current and potential investors to help with fundraising, hiring, and strategic decision making.
Browser our investor database that is hand curated by the team at Visible. We include the fields and filters we find most important when searching for new investors.
This template is intended for companies that are pre-traction/revenue. Even if it is simple, sending Updates from day 1 is a great way to stay top of your investors mind’s moving forward.
We hope this guide is helpful to you as you kick off your seed round. To get your fundraise started check out Visible Connect, our investor database. Automatically add your investors into a pipeline to manage conversation and engagements so you can focus on building your business.