Convertible Notes and Startup Funding
February 12, 2025
Entrepreneurs who start up new companies have to deal with a lot of different types of stakeholders. As a result, they have to enter into a wide variety of agreements with these different stakeholders. Over the course of time, it is possible that the entrepreneur and an external party may not agree on some of […]
In most bankruptcy cases, senior classes of creditors have more power as compared to junior classes of creditors. This means that the re-organization plans are generally meant to satisfy the needs of senior classes of creditors. However, there are some cases in which companies give importance to the needs of junior stakeholders as well. There […]
Smart contracts is another term that is commonly used within the cryptocurrency community. For the layman, this term can be intimidating if they do not know the meaning of the term. However, once the meaning is explained, the term and its implications become quite easy to understand. Also, the various applications of the smart contract […]
Modern-day start-ups can be of many different types. They can be differentiated on the basis of several parameters. One of the parameters which are used for such differentiation is called the revenue model. Many people confuse the term revenue model with the more commonly used business model. In this article, we will have a closer […]
The American energy sector has really taken off in the past few years. The discovery of “fracking” or hydraulic fracturing has completely changed the dynamics of the oil and gas industry. The end result has been a historic boom in the oil and gas industry. For the first time in many decades, America has become […]
In the previous article, we have already learned what seed funding is and the various sources from which it can be acquired. It is important to mention that theoretically seed funding can be obtained from various sources. However, in real life, it is remarkably hard to obtain. There are very few entrepreneurs who are able to obtain seed funding.
In this article, we will have a closer look at some of the reasons which make obtaining seed funding difficult.
Startups in general have a high failure rate. About 90% of all startups fail within the first year. Hence, when investors are providing seed funding, they know that the odds are stacked against them. As a result, they are very picky about these investments and this makes it difficult for entrepreneurs to obtain seed funding.
This lack of organized funding leaves entrepreneurs at the behest of their own friends and relatives or the unorganized market. These investors are often very difficult to convince. Even if they are convinced, they generally ask for a disproportionately high stake which disincentivizes investors from seeking funding from them.
Hence, companies requiring seed capital are in effect competing with much more well-established companies. These companies may already have a product and some of these companies may have also had some traction from prospective customers. This is what makes late-stage companies more compelling to investors and incentivizes them to ignore early-stage companies.
It is common for some of the co-founders to exit the business and for some more co-founders to be introduced into the business at this stage. Since the leadership team is not stable, investors cannot properly evaluate and make their decisions. This is also one of the reasons that they avoid investing in businesses that are at the seed funding stage.
Now, since we have seen the various reasons why seed funding is difficult to obtain, it is also important to know the characteristic which makes companies more likely to obtain seed funding. This characteristic is called traction and is often difficult to explain.
Traction is the state when a business is able to present a compelling story to the investors. It is possible that some investors based on the worth of the idea and on the reputation of the founders. However, it is important to note that most investors would want to witness some sort of statistics that makes a compelling case.
For instance, in the case of businesses that are based around information technology or applications, user adoption is considered to be a key parameter. For example, if the number of downloads of an application is growing at the rate of 10% per week, it is considered to be a positive sign by the venture capitalists. However, if the number of downloads is staying flat, this is considered to be a negative sign.
Traction is the investor’s way of evaluating whether the idea is being enthusiastically accepted by the target market. Companies which are able to portray such a compelling story through credible statistics which the investors believe in are much more likely to obtain seed funding as compared to other firms who are also making an attempt to do so.
To sum it up, seed funding can be incredibly hard to obtain. However, there are some steps that can be followed in order to increase one’s chance of obtaining seed funding.
Your email address will not be published. Required fields are marked *