It takes a lot of time, energy and, especially, money to build a business from the ground up – even at the earliest stages. For entrepreneurs working to turn their dreams into reality, scoring venture capital or support from angel investors can be a major goal. And, from almost the very beginning, seed-stage funding can come in handy, helping to launch the hard work required to determine if that nugget of an idea is really a viable commercial enterprise.
Securing early investment in a company can seem like a big win, but it also comes with plenty of risks. Before seeking investment for a burgeoning business, entrepreneurs must be cautious and fully informed.
What is seed-stage funding?
Seed-stage funding is where venture capital financing often begins. At this point in the birth of a business, seed-stage funds are typically used for market research, product development and business expansion – the foundational work required to build any successful operation.
The total amount invested at this stage is typically smaller than at other points in the venture capital process. But those numbers are on the rise. According to Pitchbook, in 2017, the median seed deal size in the United States was $1 million, up from $500,000 about five years ago.
Seed-stage funding can be the boost that a startup needs to get started. But venture capital isn’t for everyone, and there are drawbacks. Founders who take venture capital may have to answer to investors before making big decisions, will typically lose some of their equity stake and could even be forced to exit before they are ready.
Is seed funding right for you?
Still, despite the downsides, seed-stage funding is worth considering for entrepreneurs who are wondering how they will ever be able to turn their startup dreams into a money-making business. If you are wondering if seed-stage funding is right for you, ask yourself these three questions.
Do you really need it?
Securing $1 million in funding for your business might sound like a dream, but it’s important to know that most small businesses never rely on VC investments to grow.
In 2017, for instance, the National Venture Capital Association counted 6,600 companies who won angel/seed or early-stage venture capital. That’s just a fraction of the total number of businesses that launch each year. Most entrepreneurs rely on their own funds or seek support from family and friends instead.
Are you willing to give up part of your business?
You’ve coddled this baby from the beginning but accepting money from a venture capital fund or winning support from an angel investor could force you to give up a major ownership stake in your company. And that could mean you’re not able to drive the business forward exactly as you’d like. Are you ready for that risk, or would you rather maintain full control?
Are you using your network to its fullest?
It’s not always about the money. Business associates, former employers and mentors may be able to provide all of the support you need without investing a single dollar. As you build your business, you also should be building a network of people who you can go to for expertise and guidance. Their advice as you struggle with a business plan or your company’s direction, for instance, could be worth more than a cash investment.
5 Sources for Seed-Stage Funding
If you’re ready to take the leap and seek seed-stage funding, here’s where to find it.
Angel investors and venture capital funds
But these days, these VC firms and investors are appearing in different forms. Super angels, for instance, are groups of investors who are actively on the hunt for startups, often in their earliest stages. Micro venture capital firms seek out companies to support at their birth. And “genesis” venture capital rounds also back startups at their beginnings.
Crowdfunding sites such as Kickstarter, AngelList, Indiegogo, SeedInvest and Wefunder all have become popular platforms for entrepreneurs to not only raise money, but to demonstrate demand for their nascent product or service. Kickstarter, alone, has raised $3.7 billion in pledges. Nearly 145,000 projects have been successfully funded on the site.
Corporate seed funds
Google Ventures, for instance, has invested in more than 300 companies that, according to its website, “push the edge of what’s possible.” It supports startups in life sciences, healthcare, artificial intelligence, robotics and other sectors. Intel, the chip giant, also invests in startups.
Business accelerators and startup incubators
Both help new companies build their enterprises, providing mentorship, support and, in many cases, funding. Y Combinator, for instance, makes small investments in companies in exchange for small stakes. And a growing number of business incubators are popping up across the country to help startups thrive.
The federal government
Through the Small Business Administration, the federal government has several programs that provide funding to small businesses.
Need help with your startup?
At Gouchev Law in New York, we work with businesses of all sizes, including startups. If you want to learn more about funding for your business, we wrote a high-level overview of the stages of venture capital. If you need counsel for your startup, call us at (212) 537-9209 or schedule a free strategy session today.