By Fernando Berrocal
Seed capital refers to the initial round of finance for a new business venture, product, or service. As an entrepreneur, you may anticipate surrendering partial ownership of your startup in exchange for the capital investment to open the business itself. This is common in cases of “business stock”; securities that represent a percentage of an organization's ownership. It can also happen in the instance of a “convertible note”, a method for seed investors to purchase shares that aren't yet prepared for a valuation.
Early pre-traction funding stages are often called "pre-seed.” Terms for such rounds can range from “friends and family” to “acorn”. These rounds happen to reach the same objective as seed funding. In a seed round, a startup investor gives either funding in return for convertible debt - a loan or economic commitment that is redeemed using an organization's equity or shares - or stocks. Growth-oriented firms benefit from early access to funding since it allows them to expand rapidly. The main question is: where to start looking for either seed or pre-seed funding?
Venture capital (VC) is a sort of private equity that investors contribute to startups and small firms with the potential for lengthy growth. According to statistics, VC investment is used by fewer than 1% of firms. Only around 2.2% of those funds went to minority groups, and about 2.7% went to female entrepreneurs. Furthermore, pitching to VCs might take months or even years (if the opportunity arrives at all.) For many types of startup entrepreneurs, VC funding isn't the best choice. At this time, it's unlikely that your business will qualify for a bank loan. However, banks often need a minimum of three years of business experience before providing cash for these kinds of loans.
So, if you're an aspiring founder who doesn't suit the usual financing mold, how can you obtain pre-seed or seed capital? Thankfully, a new generation of startup financing sources is on the road, all of which have been designed to make startup investment more approachable and founder-friendly for a variety of businesses. Here are four ways to get pre-seed and seed investment for your organization.
- State and Federal Startup Grants: A multitude of grants are available for early-stage entrepreneurs and small firms. Grants, unlike many other types of startup investment, do not force you to abandon equity–or repay the funds. Traditionally, startup grant programs target underrepresented populations including minorities, vets, individuals from rural areas, and nonprofits. They usually concentrate on promoting specialized industries, such as education, innovation, or medicine. However, there isn't a single database that has all potential grant possibilities, so you'll have to do some homework if you choose this route. Here are a few websites to check: Grants.gov, SBIR.gov, and OpenGrants.
- KnowCap: This tool is based on the philosophy of skipping a stage and swapping equity for the experience if you're preparing to utilize seed capital to employ a team. This platform connects businesses with a group of startup experts that specialize in critical areas such as marketing, sales, engineering, and strategy. These specialists engage with entrepreneurs to give coaching, strategic direction, and value creation. They design a product MVP, developing a brand identity, and set up calls with potential consumers. Founders give KnowCap shares in return for access to these services, also termed "knowledge capital." While this doesn’t qualify as pre-seed or seed investment in the classic sense, it’s a good option for helping founders lay a solid foundation on which their business may expand.
- Republic: This is the most popular venture financing app. It's a crowdfunding platform that allows entrepreneurs to raise funds from individual and institutional investors; like Kickstarter for businesses. Without having to spend hours on pitch meetings, entrepreneurs can obtain pre-seed and seed funding from a network of passionate investors using this strategy. This does imply that firms must pass a rigorous screening procedure; just around 5% of applicants will be selected. They do, however, provide a unique chance to rapidly get in front of a large number of potential investors without having to pitch each one individually. It's a difficult yet efficient method of obtaining initial money for your business.
- Zebras Unite: This is a business co-op created primarily to help entrepreneurs who are overlooked and undervalued by traditional venture capital firms, such as women and minorities. What originated as a social gathering has turned into a source of funding. You've seen businesses referred to as "unicorns", but this platform is a deliberate rejection of the unicorn success paradigm. You'll likely feel comfortable in the Zebras Unite environment if you're developing a community-based, mission-driven organization.
Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.
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