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What is Seed capital
Seed capital: Suppose you have an idea for a business that you think might be successful. It is a solid idea that solves an existing problem in the market. It’s an idea that, if executed well, can play an essential role in some profitable niche markets.
This business may have a lot of potentials. But you will notice that to execute specific ideas; you will need a lot of money to get them off the ground.
Sometimes trying to finance your early-stage business through a lifetime of savings can be a recipe for disaster. It usually takes time for companies to build loyal customer bases, making it extremely risky to bet all your money on an idea.
If you need to start a business, you will most likely need to obtain seed financing from outside capital. In this thing, we will explain the basic concepts of the first rounds of financing ventures or startups.
What is Seed Financing?
Seed backing is the first round of official funding for new startups or ventures.
In a seed round, an investor provides the financing in exchange for convertible debt or shares in the company.
The best way to think of seed funding is like growing a tree (hence the name ‘seed’).
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Why Should I Raise Seed Capital ?
The simple answer is that many startups cannot get to a point where their product is ready to sell without a good amount of capital.
Related posts like product development, employee salaries, and infrastructure expenses add up pretty quickly, meaning you could easily be expenditure thousands of dollars on capital before you have anything to sell.
Seed funding allows founders to invest in seed marketing or PR, key hires, or building a successful team.
When To Raise Money
Suppose you have a good idea that solves a real problem that affects a niche big enough for your company to scale, coupled with a founding team with vision and training to run the business. In that case, it will be relatively easy to convince and get investors to extend a check in your name, but it is not always convenient to hurry to resume money.
Founders should raise money when they’ve figured out what the market opportunity is, who the customer is, and when they’ve delivered a product that fits their needs and well adopting at an interestingly fast pace.
When the founders noticed that the lack of monetary resources prevented the company from growing as quickly as possible, it was a sign that they should obtain external funds. It is dangerous to run the risk of a competitor taking over the market with a product similar to yours.
How Much To Increase?
Ideally, it would help if you raised as much cash as it takes to reach profitability so that you never have to raise money again. If you’re successful at this, not only will it be easier for you to raise funds in the future, but you’ll be able to survive without new funding if the funding environment gets tough.
Certain types of startups target a more massive market or need more financing for their products that will require a follow-up round. Your goal should be to increase as much cash as possible to reach your next “bankable” milestone, typically 12-18 months.
One way to see the optimal amount to raise in your first round is to decide how several months of operation you want to fund. Then answer how much money you plan to need per month to get going and multiply that by the number of months you think you’ll need before you start getting passive results that could break even (usually 12-18).
How Financing Or Seed Or Initial Capital Works For Startups And Investors
When you are financing your business, your potential investors also need to get something out of the deal; that is, they need an ROI (return on investment). It is the return they expect to get on their investment. This return may obtain from sales of your participation in future investment rounds, through dividends, or in a subsequent IPO.
The initial investor provides you with funds in exchange for an equity stake in your company, usually between 20% and 25%. It means that they own a percentage of your business.
Shareholders receive a portion of the dividends relative to their shareholding, although the investor’s main incentive here is to hold shares while the company grows and sell them later for a higher profit.
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