Steps to raise seed capital
A detailed guide on how to raise seed capital
Newly formed enterprises have to bear the burden of insufficient funding, shortage of resources and a lack of customers. From the very beginning, they have to employ cost-cutting practices, build connections within investor networks to get access to funding while also employing tactics such as sweat equity etc. to fuel business growth. If you are thinking about starting a business you should make sure you understand that you will have to cover multiple roles just to get the business off the ground. In these scenarios having the support of a startup accountant can add immense value, reading literature such as a Guide to starting a business or Funding Methodologies can also play a huge part in one’s long term success.
A large number of businesses are born and die during the year, however as per the office of national statistics fewer businesses have died in the UK than born, in 2018 there was a rate of 11.4% businesses dying compared to a rate of 12.9% being born. This confirms that even though the percentage of businesses starting up survive the percentage is not huge. One reason for failure is running out of funds.
This article will discuss everything you need to know about Seed Capital and steps to follow for raising a Seed Capital?
Seed Capital, All you need to know about it
The funding required by startups at the initial stages of their business formation is called seed capital.
Seed capital is the initial money that enterprises raise to help grow their company. As the name suggests, it is similar to planting a seed to generate cash-generating crops, seed capital is the money that is provided to businesses to help them grow and yield substantial profits for its investors.
Related: If you have raised the required funding and are looking to grow your business you might want to read our guide on how to grow your business.
Without sufficient funding, entrepreneurs struggle to manage and grow their business initially and in the long term. There are many sources through which early-stage startups can raise seed capital for their business, for instance, through friends and family, accelerators, incubators, angel investors and venture capital firms. If you are the lucky few businesses who have surplus cash why not learn how to grow it?
Funding startups without any revenue, customers or any sort of traction can be extremely hard to do. However, Angel investors who hail from the industry or believe the idea or business model to be exceptional might still be willing to invest subject to certain terms and conditions. Speak to your startup accountants or business advisers to understand the presentation you might be able to give to make your business seem more attractive to investors.
You want to raise seed capital, but who can fund you?
Acquiring sufficient seed capital is an arduous process and requires you to approach the right people at the right time with the right business plan.
The following groups might be able to assist you in your funding goals:
- Angel investors
- Friends and family
- Startup accelerators
Angel investors are normally high net worth individuals who possess an interest or expertise in a certain industry in which they are willing to invest for long-term benefits. These investors provide the desired level of financial support and expertise to businesses in their early stages. The funding provided by such investors is usually between £50,000 to £2 million which is a good start for startup owners to meet their initial business objectives so as to get their business ready for further investment. Angel investors are normally savvy with finance, otherwise, they might use startup accountants to help them carry out financial due diligence on your business. Speak to your accountant to make sure your business is ready for due diligence by investors.
In some instances, angel investors may group with other investors, to fund a business idea, forming an investor pool. Angel investors have their vested interest in the startup they sponsor, the funds they provide are usually in exchange for a share of ownership of the company.
Friends and family:
Building trustworthy and profitable relations with investors is, without any doubt, one of the most difficult tasks a business owner is faced with. To avoid the effort and hassle, most entrepreneurs usually approach their friends and family for the initial funding if they are not able to bootstrap the business themselves. There is no doubt that friends and family can be an ideal resource of seed funding, but there are certain considerations to keep in mind, such as your relationships and the potential impact your business performance can have on it. So, it is advisable to let your close ones know about the risk they are taking with their money from the very beginning.
Startup accelerators are becoming an increasingly popular means to get a startup funded amongst entrepreneurs. These accelerators provide the necessary amount of funding, expertise and training to help businesses get past their early stage to prosper into a fully grown business.
Like angel investors, these accelerators also seek to acquire a share of ownership in the company in exchange for providing expertise and money.
What should you do to raise seed capital?
Decide who to approach, when and how?
Adequate preparation is key to effective fundraising, without which the chances of failure increase significantly. If you are planning to approach an angel investor, you need to be well-prepared, as you will get one chance to create an impression and convince the investor to invest. Businesses normally depend on their startup accountants to help, as they would have worked with and analysed hundreds of businesses and potential scenarios.
Angel investors have huge time constraints; they have to screen out the most desirable businesses out of a long list of proposals. So, it’s advisable not to test their patience by presenting badly prepared presentations. Do your homework, research hard! Get their attention with a catchy introduction comprised of formal business phrases, combine this with mind-blowing figures and statistics. You need to present something that makes you stand out from other startups requesting seed funding.
Most importantly, you need to build a robust social network, do your research to find out someone who can connect you to these guys. A useful reference can help land you right at the doorstep of an interested investor. Start by speaking to your startup accountant, they might be able to point you in the right direction.
If you plan to work with a startup accelerator, then you don’t need to worry, you will have instructions provided on what to do on their website. Unlike angel investors, you don’t need a catchy introduction, as you will be enrolled under a training programme once you register for it and are selected.
Private investment from loved ones could be the best thing ever. But the opportunity cost is high, the cost of losing personal relationships on top of the capital loss can be devastating, emotionally and financially both.
The dos and don’ts – when meeting your investor
Once you have arranged a meeting with one of the investors, you need to do your homework. By homework, we mean to prepare a brief but concrete business plan that clearly shares your business intentions. Also, make sure you are familiar with key terminologies related to funding.
An investor will generally want to know things such as:
- What do you want to achieve?
- How do you plan to achieve it?
- What timeframe do you require to return the funding?
- What value are you going to provide to the investors?
These are some of the questions investors expect you to answer in your business plan.
Let your investors know that you’re educated and well-read by showing good manners. Above all, make your discussion brief, smart and to the point.
What to do next?
Once the meeting is done, send a follow-up email to thank them for giving you time out of their busy schedule, and for providing suggestions on your business plan as well.
Do not cling to high expectations, instead of waiting for them to call you back, just finish the seed round and refocus on laying down solid foundations for your business,
Focusing solely on the seed funding implies that you have stopped paying attention to other business areas, so it is advisable to stay put and focus on what to do if you don’t really get the seed funding.
If you are lucky enough to be awarded the amount of seed capital you desire, then it’s about time you start striving to develop your business for sustainability or the next round of funding.