What is Seed Funding?
Seed funding is the first official stage of equity, the first funding a startup gets to establish itself.
This is the finance raised to help the startup grow from a business plan into a flourishing business. Seed funding supports startups on their first steps which include audience research, product development, and brand creation.
Seed funding comes from a variety of sources but predominantly from Angels. Angels are investors that invest via equity financing which means that they own part of the startup in exchange for the investment.
How Does Seed Funding Work?
Alternative seed funding sources apart from Angels come from family and friends. You can give friends or family a share of the business in return or establish a repayment plan that benefits them in the long run.
Most startups launch after getting their first stage of seed funding. . This finance is usually spent on any research and development required to create products designed for your target audience or on solidifying your business plan.
The seed funding you acquire usually needs to be sufficient to run your startup in the first phases inclusive of overheads, wages, and tax responsibilities.
Pre-seed funding is the infantile stage of funding which is why it is often excluded from the seed funding process entirely.
This phase is when the startup’s founders are getting operations running. The most common pre-seed funders are founders themselves or friends and family.
This covers the initial cost to set up and plan out the business idea. This can take a while particularly if the founders are working on their business plan around a full-time job.
The seed of your startup needs sunshine and water to thrive which equates to funding. This analogy is used because this is the finance that your startup will need to sprout.
Seed funding differs hugely in the amount of finance and can vary from thousands of pounds to millions depending on the business idea and the investor’s confidence in your startup’s success.
Series A Funding
Series A funding is the next step once a startup has created a measurable record such as in a number of customers, reliable revenue, and upcoming projects. Startups opt to push for series A funding when they plan to increase their customer base and expand their product offerings.
A long-term profit business model will be necessary here. This is all about how to effectively monetize your startup.
During seed funding investors are identifying great business ideas but when it comes to series A funding they are looking for validated strategies to turn an impressive profit and be a success.
Investors collaborating across this level of funding come from venture capital firms such as London Venture Partners, SPARK Ventures, Bessemer Venture Partners, Greycroft and Bain Capital Venture.
It is becoming increasingly common for startups to utilise crowdfunding to generate the level of capital required for this level of funding.
Series B Funding
Series B funding is when you push your startup past the development stage by expanding market reach with investor support. Growth is the ultimate goal here so that demand can be satisfied.
Polishing a product, expanding your team, increasing business development, sales, advertising, support, and tech all come with large price tags.
Startups applying for series B funding are established with validated valuations that reflect large profit margins in the millions.
Similar to series A funding, this stage is financed by investors. The difference between them is that there is a new selection of venture capital firms that focus on later-stage financing.
Series C Funding
When your startup is successful and prepared to scale with new products, new market expansion, and acquisitions. This is the stage when investors funnel capital into the successful parts of the startup in an attempt to double or triple their return.
Scaling can happen in a variety of ways including acquisition. Acquisition of successful businesses reduces the overall risk for investors thanks to a stable business model that has demonstrated healthy returns on investment. Investors are then willing to commit more finance to the startup which in turn supports scalability.
Series D and series E funding exist but most startups can establish a global presence with series C funding.
Startup funding is a hierarchical approach to ensure that your startup’s success matches the risk taken by investors. Understanding the difference between raising finance will help you understand what your startup needs to grow from a seed to a sapling and beyond!