Seed Investment is the type of financing used to form a startup.
Obtaining seed capital is, for many start investors, the very first money that a company raises. Some startups, however, might also raise a pre-seed.
Understanding Seed Investment – A Guide to Seed Funding
Seed Investment is the first official stage of equity funding in a startup’s lifecycle. The seed money assists the company in financing its first steps, including product development and market research. The “seed” investment helps the company in this very early stage to take an idea, then form and grow its business. With a successful strategy and enough revenue generated, the company will grow into a “tree”, and both the founders and the investors will enjoy the fruits of their labor and dedication.
Types of Investors in a Seed Round
Investors in a seed funding can be the founders themselves, their friends and families, incubators, and, of course, angel investors and venture capital funds (seed ventures) which focus on early-stage startups. For some startups, the seed round is also the last round of financing, in the case that the money raised runs out before the startup succeeded in gaining momentum and revenues, or if the founders decided that the raised money is sufficient to allow further growth.
Typical Amounts of Capital in a Seed Round
When investing in startups, funding rounds vary significantly in the capital raised and the terms of the investment. Usually, when we ask ourselves how much money is involved in a Seed funding, we are talking about (usually!) between $500,000 and up to $2 million – but it may be more or less, depending on the company’s type, market, and the products it develops. The seed round should help the very early phase startup to execute their product.
Typical Valuation in a Seed Round
Before any round, as well as a seed round, the company’s valuation is reviewed based on factors ranging from team track record, market size and other variables. The typical valuation for a company raising a seed round is between $3 million and $6 million (again, this is not always the case and reality is obviously far more complex).
Seed Investment: Investing in Potential to Grow Rapidly
With the limited investment of capital, the startup needs to fulfil its potential, grow, and succeed.
Investors often look for a balanced risk vs reward profile: they want that the high risk they take, by investing in a new, innovative and disruptive idea that has not been previously tested in the markets, to be balanced by high potential returns. In addition, they want to be sure that the startup will be scalable, and that the startup will be able to expand its operations and serve additional customers and new markets very quickly. Timing, as always, is also crucial to a startup’s success.