What is seed funding?
It’s simply the first significant investment a start-up attracts before moving on to larger funding rounds.
Read on to learn more about what seed funding is, and how it progresses to Series A, B and C funding.
How does seed funding work?
Seed funding pairs promising start-ups with private investors who are willing to take a punt on an innovative product or service. It’s a way for entrepreneurs to bypass traditional lenders like banks, who are likely to want more reassurances.
It typically takes the form of equity financing, where start-up funding is provided by the investor in exchange for a stake in the business. The seed funding amount doesn’t always have to be big. Instead, it can just be enough to get a product off the ground, covering expenses like research and development, rent and employee wages.
How to get seed funding
While it may be tempting to rush into a deal, working out how to get seed funding takes time and careful thought. From deciding on the timing and appropriate amount to raise to understanding the different types of seed investor, here are some of the key steps to consider.
Getting your timing right
It’s a good idea to aim to get the timing just right when raising funds for the first time. Seeking investment too early might damage your reputation, while waiting too long could mean you miss the boat and lose momentum.
With so many attractive companies to choose from, investors will always need convincing before they commit to any start-up funding. For that reason, it helps to have a tangible product or service to demonstrate to them.
You may need to go even further, using hard data to highlight the market opportunity, potential audience size and future growth prospects.
Choosing a seed funding amount
There’s no one-size-fits-all seed funding amount. The exact sum will differ from business to business, depending on your progress to date and long-term goals.
Some business owners look to raise enough cash to become profitable. Others seek to grow to a size where they can take part in additional funding rounds. Ultimately, it will come down to your personal vision and ambitions.
Finding your ideal seed investor
Seed investors come from a range of backgrounds. They often include:
- Angel investors. These tend to be experienced businesspeople and individuals with a high net worth who take a minority stake in start-ups. They’re normally very proactive, offering mentoring and advice, as well as seed funding.
- Crowdfunding platforms. It’s possible to raise money from thousands of investors through equity crowdfunding campaigns. They’ll each get a small slice of your company in exchange for their financial support.
- Accelerator programmes. These aim to get promising start-ups primed for investment and growth. They often provide direct equity investment, along with mentoring support.
- Venture capital. VC firms may take an equity stake in start-ups that have significant growth potential. They usually get a say on the future direction of the business too.
Before searching for seed investors, you’ll need to make your fledgling business official. Learn how to register a business in the UK.
Making the most of government schemes
The government-backed Seed Enterprise Investment Scheme (external link) (SEIS) provides a handy way for start-ups to attract seed investors. Under this initiative, investors buying shares in eligible companies can gain tax relief.
However, a range of conditions apply to firms benefiting from SEIS investment. For example:
- You’ll need to have fewer than 25 employees classed as full-time or equivalent.
- Your gross assets can’t exceed £200,000 when you issue shares.
- Any money you raise must be spent within three years.
You can make an application to join the scheme via HM Revenue and Customs (external link).
Find out more about the grants available for small businesses in our guide.
Where seed capital fits in the start-up funding timeline
When working out how to get investment for your start-up, it’s worth remembering that seed funding only represents a single stage. Here’s a quick rundown of how it fits into the wider funding journey.
What is pre-seed funding?
Pre-seed funds are informal investments that come at the very beginning of a company’s life. In fact, this type of financial support is so informal that it’s not even counted as an official fundraising stage.
Rather than including external investors, it’s often just made up of personal savings from the company founder – or funds sourced from friends and relatives. The focus is very much on getting the basics right and laying the first foundations.
As you’d probably expect from their respective names, seed funding comes straight after pre-seed funds. It’s generally regarded as the first official fundraising stage.
Series A funding
Series A funding is designed for start-ups with a proven product. However, they also need credible plans to convert it into a sustainable, scalable and profitable strategy. Venture capital firms often play a big role here.
Series B funding
Series B funding is the next step for more established firms seeking to break out of the development phase. It gives companies the financial clout to cater for a growing customer appetite for their products.
Series C funding
This form of funding is targeted at proven, well-established businesses. They’ve successfully scaled their operations and now hope to expand into new categories or regions. An acquisition might also be an option here. Private equity groups, hedge funds and investment banks may all get involved at this stage.
Playing the long game
Seed funding can prove highly valuable in pushing your business to the next level. But it’s a good idea to view all start-up funding as a marathon rather than a sprint. Due diligence and careful research are vital before accepting any investments – and all parties need to know exactly what they’re getting from the deal.
At Hiscox, we want to help your small business thrive. Our blog has many articles you may find relevant and useful as your business grows. But these articles aren’t professional advice. So, to find out more on a subject we cover here, please seek professional assistance.