Convertible Notes and Startup Funding
February 12, 2025
The Importance of Major Pairs The Forex market is a place where trading happens in all currencies. However, the volume of trade that is conducted in different currencies is very different. Hence, even though there are hundreds of currencies in the world, about two thirds of the massive $4 trillion dollar Forex volume is transacted […]
Domestic Funds Transfer It is common for individuals and entities to transfer funds to their friends, family, business partners, and associates. The way funds transfer works is opaque to the individual as he or she simply instructs the banks (or enables funds transfer when using online banking) and waits for confirmation from the other end […]
Dividend discount models are based on the assumption of constant or linear growth. However, a mere look at the empirical data will prove that this is not the case in reality. Growth is almost never linear or constant. In fact, in strategic management, the concept of product or company life cycle is taught wherein there […]
The two tiered system puts the central bank in control of the commercial banks. Therefore, the government authorities have delegated some of the regulatory responsibilities to the central bank. It is the job of the central bank to ensure that commercial banks are conducting their business in a manner which is considered ethical as well […]
Governments all over the world generally levy graduated taxes on their population. This means that as the income being taxed increases, the tax rate also increases. Under a graduated tax structure, some amount of income is exempted from the tax. Then, there is a different tax slab, which becomes applicable as soon as the income […]
Creating a successful startup business can be a daunting task. This is because a startup business needs a viable idea as well as significant funding in order to be able to grow into a successful business.
Now, viable business ideas often come to people who are deeply engaged with the work in their day-to-day life.
For instance, a software engineer might be able to note the pain points during the software development and testing process and they may have an idea to create a product that can solve the same.
Similarly, a teacher may have ideas about how the process of educating students can be improved.
Viable business ideas are the result of deep experience in any field. However, it is not necessary that the person who has an idea would also have the funding to execute that idea. Hence, there is a need for a marketplace where people with viable ideas try to collaborate with other people who have the financial resources. This process is called fundraising.
Fundraising can be done at various stages. The earliest of these stages is called seed funding.
In this article, we will have a closer look at what seed funding is and how entrepreneurs should approach it.
Seed funding is external funding that a proposed company seeks before they have any product or prototype ready. At the seed funding stage, the entrepreneur may only have an idea. They may or may not have a team to execute that idea. The immediate objective of seed funding is not to create a strong and successful company. Investors, as well as entrepreneurs, are aware of the fact that seed funding is only to take the company to the next level.
Ideally, seed funding is required to provide the entrepreneur with enough capital to conduct an experiment that results in a proof of concept. Once this concept is in place further rounds of funding may be required to create a viable business.
Entrepreneurs may not be required to raise seed funding if they themselves have the funds required to create a proof of concept. However, a lot of the time, this will not be the case. Hence, it is important for them to be aware of the various possible sources of seed funding.
Sometimes entrepreneurs may be able to obtain a lot of capital in the form of seed funding. It can be tempting to raise more capital than what is required. However, investors must be aware of the fact that if they are raising more capital at the seed funding stage, they are selling their idea cheaply. This is because, at the seed funding stage, the idea has not been validated. Hence, the valuation offered to the startup can be very low.
Once the startup has a working prototype or a proof of concept, it will be able to obtain much more funding in return for the same equity stake. Hence, if an entrepreneur really believes in his/her business, they would raise as little money as possible during this stage. The objective of this fundraising is to create more investor confidence by proving that your theoretical idea can be put into practice. A little bit of buffer money may be required for contingency purposes as well.
The bottom line is that seed funding is a powerful financial tool for entrepreneurs. However, it must be used sparingly in order to maximize the valuation of the firm.
Your email address will not be published. Required fields are marked *