What is Seed Funding for Startups?

Published On: Jul 23, 2022Last Updated: Jul 23, 20224.8 min read

Seed funding is the funding provided to a business when it is at its conceptual or scaling stage. Seed funding for startups is applicable when a business idea is ready, and the business model, prototype of the products, logistics, set up of the office, etc., are all under process. 

What is Seed Funding?

Operations of any business require funds to meet its day-to-day and capital expenses. When a company issues shares in return for the first official investment, it is known as seed funding. This seed investment can be from individuals/legal entities/venture capitalists. Seed funding for startups can also be from friends, relatives, companies or anyone over 18 years of age. Seed funding gives companies a push for starting or setting up a business. A couple of mandatory documents for fundraising also need to be looked at by the company to raise funds. So, if you want to start a new business and want to know what is seed funding, keep reading!

Why Do Investors Prefer Seed Funding?

Investors prefer seed funding because of the low rate of equity shares. Seed funding for startups is raised at the beginning, making it the first investment in the company. As the business is in its initial phase, the company’s valuation may not be very high. Thus, the investors can get an advantage of buying equity when the company is at its lowest valuation. They can get the equity at a cheap value. After considering the business model, the investors may invest, and the company’s value increases with company growth. This enables the investors to hold the company’s equity during the development of the company.

Seed funding for startups is usually done by issuing the company’s equity or preference shares. With the help of the seed investment, a start-up gets support to move ahead with the business’s operations. They can expand and invest for the smoother functioning of the company. Start-ups can also get expert advice from investors for growth and profit. 

The founders of a startup can also be the investors during the seed funding. Such funding is known as bootstrapping funding. Bootstrap funding can also be considered pre-seed funding and helps the business get on its feet.

Purpose of Seed Funding for Startups

The primary purpose of seed funding for startups is to kickstart the company’s operations. Start-ups generally struggle to generate profits because of low finance. As a result, the growth gets hampered. Due to low cash flow in the business, the required activities get restricted. Seed funding for startups is essential as investment helps boost the company.

All in all, seed funding assists the newly incorporated companies become operational. Seed investment helps the founders and the company to continue with their business model and implement it into the business operation. They can use the funds to start the business’s functions and fully establish it. With the funds raised, the start-up can cover the initial expenses like setting up the business, operating, developing, and other expenses.

The founders must abide by various compliances as per the Companies Act, 2013 before and after raising funds.

Advantages of Seed Funding

When a start-up raises funds through seed funding, there are several advantages. Some of them are as follows:

1. Willing to take risks: 

The most significant advantage of seed funding for startups is that the investors are willing to accept the considerable risk of failure that comes with launching a business. Investors take risks by providing financial assistance to the company as it is not in its profitable phase.

2. Debt-Free Financing: 

This is the most common type of debt-free financing. When any amount is borrowed or raised from anyone, the company can provide equity holding to the investor without any obligation to repay that money which helps the company to be debt free.

3. Rapid Growth: 

Seed funding for startups provides the financial resources that facilitate them to cover initial expenses and seize new opportunities and accelerate their growth.

4. Expert guidance and support: 

Experts’ advice is crucial when a company is in its early stages. Investors provide the company with their experience and knowledge, promoting its progress. This is one of the greatest advantages of seed funding for startups.

5. No Instalment: 

In seed funding, the shares are provided to the investors and not subjected to any instalments. They become the owners of the equity shares without any obligations. This reduces the burden on the company to pay back the investor’s money.

Seed Funding for Startups Acts as a Backbone

We hope now you know what is seed funding and why it is important. When a company is in the planning stage and building its prototype, the future is undetermined. So acquiring funds may be a challenge. Any seed investment is at the risk of its investors, making it profitable for the company. For investors, it can go both ways: they can make huge profits, or it can be a failure. Accordingly, investors choose to invest depending on how innovative the business model is. They will consider the future profitability of the business. It comes down to the capability of the founder to take the business forward and how it is pitched to investors. Hence, seed investment acts as a backbone and makes the company operational by providing expert knowledge and financial assistance.

Let Us Help You!

Given the complexity and the expertise required during and after the funds are raised, it is advisable to seek professional help. Experts at LegalWiz.in have worked with many brilliant start-ups and growing businesses during their growth stage to help them take the leap. We have served 6000+ clients to date while maintaining 9.6/10 unfiltered ratings.

Let us be a part of your growth! Get in touch toll-free on 1800 313 4151 or support@legalwiz.in.

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Rutu Mistry
About the Author

Rutu Mistry

Rutu Mistry is an advocate and is associated with Legalwiz.in, handling the matters related to IPR and Corporate. She believes in consistency and discipline in her work to create an impact in the legal fraternity.

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