India is fast becoming a start-up hub and there have also been many unicorns in the country. These start-ups have ensured good employment opportunities and also a healthy ecosystem for innovation and development that ultimately help in nation-building. However, one of the key requirements for any start-up is the constant need for finance. It not only helps them to get on their feet but also helps in scaling up operations at later stages. One of the primary aspects of financing a startup is getting the seed money.
Given below is the meaning of seed money as well as the need for the same along with related details.
What is the meaning of seed money?
Seed money is the finance that is needed by a business at the initial stage to start its operations which essentially leads to the formation of a business idea into a reality. There is a high degree of flexibility in the type of seed money and the uses for the same. This seed funding can be used for key purposes like
- Meeting the working capital needs, product development, etc.
- The inclusion of strategic business partners that add significant value to the business,
- Understanding market dynamics and the demography,
- Purchasing essential machinery and technical facilities, etc.
Investors can offer seed money in the form of equity or debt depending on the nature of the agreement between the investor and the company. The Government of India has acknowledged the importance of start-ups in the country and the challenges they face in getting seed money and hence, has introduced the Start-up India Seed Fund Scheme focusing on Tier II and Tier III cities where access to seed funding is quite limited.
What are the options for getting seed money?
As mentioned above, the sources of seed money can be quite flexible as there are multiple options that can be accessed. Some of the types or sources of getting seed money are,
- Bootstrapping
One of the top sources of funding for a venture is its own funds. The start-up owner can use their own savings to initially set a base which also increases the confidence of external investors in the business. Every entrepreneur mostly starts by investing their own funds to a certain degree while some go all out and invest every penny they have. There is no correct answer whether to use one’s own funds entirely or not but it is always advisable to have a financially secure plan to fall back on as success in start-ups usually takes a long time.
- Crowdfunding
Crowdfunding has been gaining a lot of importance as a source of seed funding. In this manner, entrepreneurs can tap into a huge source of funds through contributions from across the globe. There have been innovative schemes where investors can also get equity shares and not just product discounts which encourage strangers to be part of the company and earn money along the way. Some crowdfunding platforms like Kickstarter have helped entrepreneurs get easy access to crowdfunding and have even surpassed venture capital funding in select cases.
- Friends and family
The immediate source of funds apart from own funds is approaching friends and family. They usually have higher confidence in the entrepreneur and also have more willingness to take risks on the venture as compared to professional investors like venture capitalists. However, it is important to tread carefully as money in relationships is always a sour point and can ruin them.
- Loans or microloans
Entrepreneurs can also approach banks and microlenders to access funds. The government also supports the start-up scenario by introducing schemes like Startup India Seed Fund Scheme. This type of funding will help the entrepreneurs secure their equity but they will have to provide sufficient collateral to access such lending options.
- Incubators
Entrepreneurs can get not only finance through this seed fund option but can also get in the form of training and technical help or in some cases even structural help like office space. Incubators usually do not seek equity stake from the start-ups.
- Venture capital
This is an option to get access to high-value funds for new ventures. Venture capitalists are seasoned investors who invest in start-ups after assessing various parameters like founder visions, the growth path for the business, market conditions and profitability, etc. Venture capitalists seek a huge chunk of an equity stake in the startup and may also provide the funds in a partial debt arrangement as the case may be.
- Angel investors
These investors are individual investors with high networth who wish to invest their wealth in upcoming businesses. These investors may not be able to provide a huge amount of funds as compared to venture capitalists, but they seek control of the business venture or its operations.
Conclusion
Seed money is the need for every startup as it ensures that the entrepreneurs can get their ventures started and nurture them along the way. Seed money is the first round of many fundings that is needed for a new startup. However, getting seed money needs to be done with caution as entrepreneurs often lose crucial equity in the process.
FAQs
Some of the ley considerations in getting seed money are,
-Approaching investors that are pioneers in the field of the target industry.
-Chalk out the clear business plan and the growth trajectory
-Project confidence in the business show success of previous ventures, if any.
-Valuation of the company
The key advantages of getting seed money are,
-Access to capital at usually a lower cost
-The willingness of investors to take risks in the business s future increases the confidence of the entrepreneurs.
-Access to knowledge and skill base along with funds
-Helps in building a good network
Seed money is vital for a business and every start-up aims to get it at the earliest. However, in a rush to get seed money it is important to avoid crucial mistakes that will damage the business in the long run. Some of such mistakes to avoid include,
-Shelling out too much equity and keeping too little with self.
-Accepting too much debt to protect equity and not being able to meet the financial obligations for the same.
-Approaching too many investors at the same time and losing focus.
-Not having a clear direction of requirement in terms of pure funds or knowledge and support or both.
Some of the common challenges getting seed money are,
-Provide full transparency of the business plan and financial statements
-Time-consuming and chances of success are not guaranteed
-Giving up excess equity which leads to a loss of control over the business
-Access to investors that go above and beyond for the business and provide not only funds but also quality advice.
