blog/article-blog/What is Seed Funding & it's types?

Dec 9, 2022

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What is Seed Funding & it's types?

Seed Funding and its types

Seed Funding is considered as the first equity funding stage. It represents the first time a business venture or enterprise raises funds. Some companies never go beyond the first round or commonly known as Seed A funding. Take the seed funding analogy as that of planting a tree. This early financial support is ideally the seed which helps to grow the business. If a company has access to enough revenue and a successful business strategy, coupled with sound management, the company will eventually grow into a tree.

Seed funding helps companies take its baby steps, including things like Market research and Product development. With seed funding, a company has assistance in determining what its final product would be and who its target market would be.

How Seed Funding works?

There are many potential investors in a seed funding: founders, friends, family, incubators, venture capital companies and more. One of the more common ones participating in seed funding are called ‘Angel Investors’. Angel investors tend to appreciate riskier ventures and expect an equity stake in the company in exchange for investment. Many founders feel that Seed Funding is just what the doctor has ordered to get their start-up launched. Once a business has developed a proven track record, it could be ready to raise additional capital via an Initial public Offering.

Types of Seed Funding:

Corporate Seed Funding: This form of seed funding helps emerging start-ups gain visibility in the market. Under this type, start-ups acquire funds from big corporate companies.

Angel Investors: These are investors who invest seed funds in a start-up in return for equity ownership or convertible debt. 

Incubators: These investors along with providing small seed funds, focus helping the new ventures through training and often provide space. Generally, incubators do not ask for equity holding from start-ups.

Accelerators: These investors mainly focus on helping the new firms in scaling up rather than supporting them during the initial phase of operations. Unlike most incubators, accelerators generally want equity in exchange for funding.  

VC Funding: VEnture Capitalists are high end investors that invest in a new venture after looking into various parameters such as market conditions, founder vision, growth potential.

Seed Funding can be divided into 4 categories:

  1. Series A Funding: The first round under Seed stage is Series A funding. In this round, it's important to have a plan for developing a business model to generate long term profit. In Series A funding, investors are not only looking for great ideas but also for a strong strategy for turning that idea into a successful venture.

  1. Series B Funding: Series B rounds are all taking businesses to the next level, past the development stage. Investors help start-ups get to that stage by expanding market reach. Companies that have gone through Series A funding rounds have proved they have a substantial user base. Series B funding is used for the growth of the company so that it can meet emerging demand. Building a product and growing a team requires a sound team.

  1. Series C Funding: Businesses that raise a Series C Funding are already well established. These companies look for additional funding in order to develop new products, expand into new markets, or even to acquire new companies. In Series C rounds, investors inject capital into the business, in an effort to receive higher returns. Series C funding is focused on scaling the company successfully.

  1. Series D Funding: Series D funding is the fourth stage that a business completes after the seed stage.

Series Funding enables investors to support entrepreneurs with sufficient funds to achieve their dreams.

Why is seed funding important?

Seed Funding can be very useful for start-ups-

  • It reduces the risk to founder in a new venture

  • It covers for funds insufficiency

  • It is a source of working capital

  • It helps expand a business by bringing strategic partners onboard

  • It provides funds to scale up and accelerate growth

How to raise Seed Funding?

To raise seed funding, it is a well established fact that the business needs to have a creative idea that can be commercialized. Along with ideas, pitch made in front of investors is also essential. The firm seeking investment should be prepared with a well documented business plan describing its target market, market potential & its financial projection over the next few years.

Pre-Seed Funding: Pre Seed funding is the time when a business is introduced to funds for the very first time. Funds are generally contributed by the promoters, relatives of the promoters. Pre-seed funding gets promoters on their feet. Funds are utilized towards the initial cost of setting up operations.

Seed Funding: Seed Funding is the first official funding made available to any business. Under Seed Funding, businesses raise funds under any of the 3 categories- Series A, Series B, Series C funding.