Seed funding is a type of finance or funding that is provided to a startup at the beginning stage. This is a stage wherein you plan or create an idea to set up a startup and get funds for it. 

Let's find out what seed funding is and what makes it so.

How is Seed Funding different from growth-stage funding?

As aforesaid, seed funding is provided in the initial stage of any business. This is the very time when the business plan is created or introduced. At this stage, such entrepreneurs look for validation from the market. It means that the new company has not yet attained recognition upon startup registration. Nor does it gain any merit in the market during this phase.   

So, it is typically the riskiest part for the entity when the fund is provided. But, it has a brighter side, which is associated with its potential to grow and attain lucrative benefits, like overwhelming returns.

So, investors mostly invest through convertible preference shares or common equity at this time. The best thing is that they avoid debt instruments that have fixed interest rates. If it has so, it would certainly put a burden on interest payment on the startup. Though, it's in the initial stage and is asset-light. It means that the company has little ownership of assets, which shows that only a small amount of fixed assets are there on the balance sheet.

However, it can think about grants, which are the most preferred financial instruments. This is simply because the government provides it through various schemes. There may be another reason, which is associated with the branding or promotion of entrepreneurship among competitors in the market.

Challenges in the Seed-stage for Startups

There are multiple challenges that you, as a startup, have to pass through. Let's get through them below:

• Product/Service

Since it's the stage wherein the idea is going to shape up into a product or service, the startup does not have any brand value. So, the ideal validation stage cannot be passed unless it has funds. With money, it would develop the Minimum Viable Product (MVP), which will be launched for field trial. Its testing would define if it should be launched finally in the market.

• Customers

Without reaching out to customers, your product/service won't value. The startup has to firmly enter the market, ensuring its acceptance there, and eventually, gaining the trust of customers for the initialization of sales. But, it's not easy.

• Processes/Operations

Technically, a founder may not have the right set of skills or expertise to regulate business practices. Therefore, it becomes a big challenge to formalise core team culture, and onboard the right fit resources.

• Business Model

This is a big hurdle because the startup has several challenges around, intervening in revenue channels, unit economics, and financial predictions for the business.

How can the startup raise funds? 

Ideally, it should start with measuring its market requirements and customer behaviour. So, the research is actually a fundamental step for laying a strong business foundation. Get ready with your business plan, which should be backed by concrete facts and case studies. You may study competitors' case studies, discover your own SWOT and compare it with competitors, make financial projections, and do current and potential valuations. Finally, you may project growth prospects.  These all aspects should be thoroughly examined before pitching to any investor.

Different avenues to raise Seed Funding

• Incubators and Accelerators

Business incubators and accelerators can be government-backed or private institutions or ventures that provide support to startups in establishing their businesses. They stand by those companies that are in the initial stages. However, capital ventures thoroughly observe and select those entities that have the potential to grow but are in the early stages.

However, incubators are such entities that have experience in the business domain and technology world. Moreover, they have their own infrastructure, researchers, administration, and mentorship.

• Angel Investors

Angel investors are also a kind of venture capital entity that has the money to invest. Basically, they come from non-resident communities, but not limited to it. But, they differ from venture investors. They actually provide funds in exchange for a stake in the business. However, angel investors use their own net worth for investment. Usually, they come foremost in this investment because they want to make personal profits or benefits. So, they demand a stake in the company, despite having a low ticket size.

• Venture Capitalists

These funds come from managed investment pools. They have massive capital and resources to invest in high-growth startups. These fund providers are accredited investors. In this case, venture capital firms target such startups that have high growth prospects, scalability, and potential to cover a huge target market. These firms come up with a massive demand for proactive control over the portfolio of the company. In the nutshell, it can be true that such fund providers are more interested in companies that are already present in the market.

• Government Schemes

The aforementioned sources of funds would invest once they have proof of the concept. Likewise, banks come up with loan facilities only for those who have assets with them. In addition, they should have proof or evidence of concept trials to have seed funds.

 The Department for Promotion of Industry and Internal Trade (DPIIT) has already started a plan, which is called Startup India Seed Fun Scheme (SISFS) with an investment or outlay of INR 945 Crore. It ensures financial assistance to budding companies. This financial assistance is available if you prove your concept. It means that you should have proof of what business you are likely to run with its scope, opportunities, product trials, market entry, and commercialisation. This is how such companies move to such a level where they have investors, who can be angel investors, venture capitalists, or banks/ financial institutions.

Like it, there are some more schemes that the Central and State government runs, which are NIDHI PRAYAS, NIDHI SSS, BIRAC’s schemes, TIDE 2.0, etc.

Conclusion

Starting a new business in India is not an easy process as you must have sufficient funds before starting a new business. If you do not have proper funds in the initial stage, then there are a lot of chances of failure in the business. Here is the complete process you need to know to register a startup firm in India.