You may be familiar with Airbnb, an online marketplace connecting hosts and guests worldwide for short-term rentals. What started as a humble idea by two entrepreneurs soon transformed into a global hospitality giant. But before they achieved this success, they needed the initial capital to fuel their growth. This is where seed funding came into play.Seed funding serves as the first external funding a startup receives, typically from angel investors of venture capital firms. This funding is crucial to provide necessary resources to validate product-market fit, build a strong team, and lay the foundation for future growth.Let’s explore key insights of seed funding and strategies to raise seed funding successfully.

What is Seed Funding?

Seed funding, also known as seed capital or seed money, is the earliest stage of startup funding. This funding is used to cover initial expenses during early-stage startup operations, such as product development, market research, and initial marketing efforts. The primary goal of this funding is to help startups turn their concepts into viable products and validate market potential. Some entrepreneurs may wonder how much seed funding is required. In Indonesia, the amount of seed funding ranges from Rp500 million to Rp2,5 billion. They can be provided by venture capitalists, angel investors, or even family and friends who trust the potential success of the startup.

How Does Seed Funding Work?

Understanding how seed funding works is crucial for entrepreneurs who aim to secure financial backing for their innovations. Typically, seed funding schemes are designed to provide entrepreneurs with the capital needed to initiate their business ideas. It works in pretty much the same way as other forms of equity and venture capital funding: startups obtain seed funding in exchange for an ownership stake in the company. Seed funding may also be structured as debt that needs to be repaid. Once funding is secured, it is crucial to efficiently allocate resources to maximize business growth opportunities. One crucial consideration for entrepreneurs is how long seed funding should last. This funding is expected to cover a period ranging from six months to two years, depending on the startup’s specific needs.

How Do Companies Get Seed Funding?

Startup companies obtain their seed money through various sources, such as:

• Angel Investors: Angel investors refer to wealthy individuals who provide funds for startups in exchange for equity. These investors often bring valuable mentorship and industry connections along with their startup investment.

• Venture Capitalists: Venture capital firms offer investments for high-potential startups. They typically look for startups that can scale quickly and may focus on early-stage rounds.

• Incubators: Incubators are mentorship programs that provide workspaces, funding, networking, training, and resources to help startups succeed. Entrepreneurs can expect to give away a percentage of their company to join an incubator.

• Friends and Family: Many entrepreneurs turn to their personal networks, such as friends and family, to obtain initial funding. This method is often less formal but can provide critical early-stage funding.

• Crowdfunding: Startups can raise small amounts of funding from a large number of people through crowdfunding platforms. They often raise it in exchange for early access to products or equity.

• Private Equity: Private equity represents a significant source of funding for companies, especially those that are not publicly traded. This is an investment partnership that buys stakes in private companies or conducts buyouts of public companies, often aiming for significant returns over a longer term. 

What Are The Risks of Seed Funding?

Startups may experience many risks when raising seed funding for their businesses. Some of the risks are:

• Not Getting Funded: One of most common risks in raising seed funding is no guarantee of obtaining seed money, despite how viable or profitable the business idea is.

• Giving Up Too Much Equity: To receive seed funding, startups may have to give up a significant amount of equity in order to attract investments. This can be risky, as entrepreneurs will have less control over your business.

• Unable to Raise Money: Once startups have received seed funding, they will need to continue to raise additional funding in order to grow their business. If startups are unable to raise additional funding at an increased valuation, their businesses will fail to grow.

• Not Having a Viable Product: Many startups obtain seed funding based on the promise of creating a great product or service that doesn’t exist yet. If the startups are unable to deliver on this promise, investors may lose confidence, and the startup will fail.

How to Raise Seed Funding For Startups?

Securing seed funds is a crucial step for startups aiming to bring their innovative ideas into reality. The strategies may vary depending on the source of seed funds, but here are the essential steps to guide you through the process:

Develop a Solid Business Plan

Before raising seed funding, you must first develop a solid business plan that outlines the company’s vision, market opportunity, competitive landscape, and financial projections. This plan not only will serve as a roadmap to success but also as a persuasive tool to attract investors. A well-structured business plan should highlight the unique value proposition of the startup and demonstrate a clear understanding of the target market.

Identify Funding Needs

Assess how much capital you need for your business and for what specific purposes. This could include product development, market research, hiring, or operational costs. Establishing a clear financial plan will help you articulate your needs to potential investors and demonstrate the viability of your business model.

Identify Suitable Funding Sources

Your suitable funding sources during the seed funding stage can include angel investors, venture capital firms, crowdfunding platforms, personal networks, etc. Networking within industry circles and participating in startup incubators can also provide valuable connections and mentorship opportunities. You can also list 50-100 potential investors who are relevant to your industry and stage of development.

Prepare Pitch Deck

A persuasive pitch deck is necessary to demonstrate the potential of your startup business. It should be able to communicate your business idea, the problem you are solving, your solution, market opportunity, and go-to-market strategy. If possible, highlight any traction or validation you have achieved so far, as this will enhance your credibility.

Negotiate and Close the Deal

Once you have interested investors, it’s time to negotiate terms about the seed funding scheme and close the deal. Clearly state how much funding you need and how much is left in this round. This transparency will encourage potential investors to commit quickly. Remember to keep equity dilution in mind. Ideally, you should aim less than 20% during this funding stage.

Grow Your Business, Secure Your Future with Phintraco Natha Kapital

Securing seed funding is crucial for growing startups that strive for success and achieve their full potential. Phintraco Natha Kapital emerges as the ideal partner for businesses seeking to fuel their innovation. Phintraco Natha Kapital is a capital company focusing on investment with a diverse investment portfolio, spanning from ICT, property, manufacturing, and education. Our support doesn’t stop at just providing capital, but also strategic guidance, tailored advisory services, and access to a vast network of industry connections. Our focus extends beyond financial returns, emphasizing the importance of supporting the people behind the business and fostering sustainable growth.By partnering with Phintraco Natha Kapital, businesses will get the financial resources needed to secure long-term success and sustainability.

Editor: Irnadia Fardila