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Seed Funding for Startups: A 101 Guide
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...
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