When seeking seed funding, entrepreneurs must convince investors that their business idea has a viable future. They should include a brief demonstration of their product, as well as a detailed financial forecast. Although they should not focus on the short term, entrepreneurs should explain how the seed funding will help their business grow in the future. A brief financial projection of the first year will likely suffice, but the real focus should be on future growth. Entrepreneurs should avoid mentioning the short term when requesting seed funding.
There are two primary types of funding: debt and equity. Debt financing is used for short-term needs, while equity is used for long-term needs. Debt financing requires repayment of the principal amount, while equity can be paid out at any time. Angel investors are often interested in a more hands-on role in a company’s operations, and they may want equity in the company. Depending on the terms of the deal, angel investors can require as little as 10% equity in the company.
While many entrepreneurs come from corporations or universities, venture capitalists are not content with that model. Although corporations and universities provide the bulk of basic research funding, entrepreneurs understand that there are more risks involved, such as betting on unproven technology in a market segment where there is a high failure rate. Furthermore, the pay structure of most corporate entities limits their upside. The upside potential of VC firms is unlimited, since there are no pay caps.
Friends and family
While banks and other sources of debt capital are rarely willing to lend seed money to companies just starting out, many people find that friends and relatives can provide the additional capital necessary to start a business. In addition to being a convenient and risk-free source of funding, friends and family are often willing to invest in speculative businesses. Fortunately, there are several ways to structure such a round of funding. Consider using a free business template to help you structure your pitch to potential investors.
Incubators for seed funding investors don’t typically provide capital to their startups, but they can offer many benefits. They provide coworking space, technology, whiteboards, and food. They can also introduce a startup to prospective investors at demo days, and may even provide free office space. Incubators often provide company building support and guidance, such as brainstorming topics and pitch practices. They also help a startup raise capital more quickly.
In return for their equity stakes, VCs and accelerators provide startup companies with capital. The percentage of ownership can vary, but the average cash investment is $39,500. Startup companies apply for accelerators online and are accepted into rolling batches, typically broken down by quarters or years.
Companies can find the most relevant accelerators on AngelList or F6S. The Corporate Accelerator Database regularly updates its list of startup accelerators. The Seed Accelerator Rankings Project compares the outcomes of these programs and ranks them on a scale from Silver to Platinum Plus.