Seed funding: What is it and how to raise capital for your early stage business

Seed funding refers to any initial capital raised to jumpstart your business idea. There are a number of ways to procure seed funding, the most popular of which is through initial investors. Keep reading to learn everything you need to know about seed money, angel investors, venture capital, and more ahead of founding your own business.

What is seed money?

Seed money, sometimes referred to as seed capital or seed funding, is the initial sum of capital new businesses receive. While there are several forms of seed money, this article will focus on seed funding from investors, popular with startup founders seeking to scale their venture as quickly as possible.

How to raise money in a seed round

Early stage companies can raise money by conducting a seed funding round. There are several types of seed funding, which we cover below, but generally money is raised by approaching seed investors with a business pitch. If all goes well, your seed stage company gains its initial money from investors in exchange for preferred stock, future equity, or convertible debt.

The process of exchanging equity for seed money is the most common form of equity financing. When investors offer seed money to a new founder, it will often be for a percentage of future profits or a percentage of the company. For example, an investor might offer $200,000 in seed money for a 15% stake in the founder's company. If you accept the offer, 15% of the total shares of your company will be transferred to the investor, often class A shares which grant privileges like voting rights.

Obtain seed capital with StoneX capital markets services.

Types of seed money

Venture capital is the most common type of seed money, but there are several ways to raise seed capital. The best fundraising option can vary for each and every different business, typically it depends on the background of the founder(s) and what goals they have for the business.

• Venture capital: The most common form, seed capital is received from investors in exchange for a percent stake in the business

• Angel investors: Venture capital investors, usually a single wealthy person, who provide funding specifically to businesses at risk of running out of funds

• Corporate seed funds: Large corporations that invest in startups in exchange for equity, intellectual property, and talent

• Incubators: Organizations which offer small amounts of seed funding along with office space and mentorship, sometimes without the exchange of equity

• Accelerators: Investors specifically focused on helping companies scale through networking, mentorship, and the provision of other resources

• Debt funding: A traditional form of seed investment from banks and investors through loans and not equity

• Convertible securities: Funding that begins as a loan but can transform to equity depending on how the startup performs

• Personal capital: Founders may use their personal savings to avoid taking on debt or sharing equity with outside investors

Angel investors vs venture capital

Angel investors provide a form of venture capital, but they differ from common equity investors in a few keys ways.

1. Angel investors generally invest lesser amounts than venture capitalist

2. Venture capitalists ask for a larger share of equity than angel investors

3. Angel investors focus on younger companies yet to fully establish themselves

4. Venture capitalists focus on larger companies, seeking the highest return on their investment

5. Angel investors typically spend more time working with the companies they invest in compared to venture capitalists

In total, angel investors seek out greener companies. Targets of angel investors may be struggling to grow but have a business mission the angel investor feels personally aligned with. The difference in motivations between the two is what gives angel investors their celestial title.

How to choose seed investors

Choosing seed investors involves more than just taking the largest sum of capital offered. You'll also want to consider what the investor(s) want in return. How much equity are they asking for? To what degree will they expect to be involved in business decisions? Do they want to enter a profit split in addition to the equity they'll receive?

Many seed investors will realistically be involved in governing decisions of the company they buy in to, whether it's because their new shares grant them voting powers or an agreement to become business partners was enacted during the investment.

The type of seed investor you choose will also play a role in this. Venture capital firms and accelerators will expect to provide strong input into management decisions. Angel investors and accelerators typically take a more casual, mentorship approach to the founder relationship.

Either way, its important to choose seed investors who can provide benefits beyond just capital. Founders are then motivated to seek out seed investors they believe can offer more than just financing, including investors with business acumen and networks they can leverage to bolster the company's success. This is what makes seed funding unique from other fundraising sources. Investors are not providing loans with the expectation of returns. Instead, they are with the founder for the long haul, invested in the future of the business.

How are startups funded?

Startups can be funded with any of the above methods. Most businesses go through several rounds of funding throughout their lifetime, especially as they are scaling upwards and establishing profitability. A funding round

Pre-seed funding

Pre-seed rounding occurs before a fully developed product or customer base is established. This round often consists of founders gathering personal capital, fundraising, or taking out loans. Rarely do venture capitalists invest in new businesses through pre-seed funding. Corporate seed funds and angel investors may enter at this early stage if they have a preexisting relationship to the founders.

Seed funding is typically negotiated based on the strength of the fledgling business and any evidence it has to suggest scalability, so many founders wait until they've developed a tried and tested business model before seeking seed money.

Seed funding

Seed funding is the first external round of investment. At this point, early stage startups must present investors with a developed business plan, market research, and at the very least a minimum viable product. Seed rounds often raise $1 to $2 million, but how much capital is raised can vary greatly depending on the business, investor, and founder(s).

For most founders, the seed round is the first time they must convince investors of their business's scalability and available market opportunity. While some startups may go through multiple seed rounds pitching to different investors, most will attempt to build out the customer base before moving onto subsequent financing rounds.

Series A funding

Series A begins once a business has built up momentum using the capital from its seed round. There should be KPIs founders can point at to illustrate success, such as early revenue, meeting financial projections, or proven market interest.

Series A funding rounds are often led by a single investor, likely a venture capital firm but potentially an angel investor. More investors will join in on the strength of this lead investor. Depending on the business, Series A can produce venture capital investments from $1 to upwards of $10 million.

Series B funding

If you've made it through series A funding successfully and grown your customer base ten or a hundredfold, Series B signals your company is a competitive player in the market. Series B funding can bring in $5 to $10 million and see companies valued in the tens of millions.

At this point and in subsequent funding rounds, previous investors will likely reinvest to maintain a strong equity stake.

How does a seed funding round work?

When you're ready to prove your product-market fit and receive a boost of capital to grow your business. If you're ready to trade equity in your business for an injection of capital and have reached a level of success that proves market-fit, there are several steps to initiating a seed fund round.

Develop a pitch deck

A pitch deck explains your product or service to investors, and it tells a comprehensive story about your business. Be honest about your current position and where you see the business moving in the future.

The pitch deck should also include information about the market, your customers, and steps for growth. Your pitch deck should be relatively concise, 10 to 12 slides is the average length, and it should use as much quantitative data as possible. Just like a resume. Make heavy use of visual aids like charts and graphs.

In-person pitches are best, but sometimes your only presentation may be through email, so it's best to curate multiple decks with this in mind.

Define target investors

There are a number of considerations to define before you approach seed investors. You should make sure the investors you reach out to have relevance, or at least interest, in your industry. Many investors and venture capital firms will list their portfolios. Use that to determine their track records and general time frames to success.

Other questions to ask yourself include how involved you want investors to be, and how much capital you need to scale to the next phase of your business. Being honest with both of these will save you, and the investors you pitch, a lot of time.

Reach out and meet with investors

When you've developed a list of investors to target, work your way through it in order of priority. Pitch to your top choices first and go from there. As you communicate with investors, you'll need to pay close attention to decide whether you truly could work well with them.

Remember, seed round investors often take a decent role in helping your company grow. It's important to find investors you can work well with who understand your business and know how best to aid you.

Most investor meetings begin with an email including a formal yet direct pitch. Keep it short, and if they're interested you'll meet face-to-face.

Again, keep your meeting short and to the point, but don't be stiff. Investors are backing you just as much as they are the company you're building. Unless you're already a skilled speaker, you'll probably get better at presentations with practice. So, don't be discouraged if it takes a while to find your style.

Practice your pitch several times before your first meeting, and don't get derailed by any rejections you face. simply learn from them and move on to the next pitch.

Negotiations and closing the deal

Just because an investor is willing does not mean you've got equity funding. Many deals fall through during negotiations. Consider your honest projects for future growth and how much of your company you're willing to sign away. Be realistic, but don't sell yourself short.

When you do put ink on paper, consider all elements of the deal. If an investor promises mentorship and personal guidance, that should be included in the contract.

Find your next investor with StoneX

Securing early investors for your business is difficult. Half the challenge is building out that pitch llist of relevant investors. StoneX offers comprehensive market services for sourcing capital and securing financial solutions. Use StoneX capital markets services to find your next investor.

Seed Investors FAQs

How much equity do seed investors take?

Seed investors typically take 10-25% equity in a startup during the seed funding round. The exact percentage depends on various factors, including the startup’s valuation, the amount of capital being raised, and the negotiations between the founders and investors.

Lower percentages (closer to 10%) are more common in startups with higher valuations or more favorable market positions. Conversely, higher percentages (closer to 25%) may occur when startups need substantial funding or have lower valuations. The goal is to balance giving investors a meaningful stake while retaining enough equity for future funding rounds and founder incentives.

What do seed investors look for?

Seed investors look for several key factors in a startup: a strong founding team with relevant experience and complementary skills, a scalable and innovative business idea, early traction or proof of concept, and a large addressable market.

They also assess the startup's competitive advantage, potential for growth, and clear monetization strategy. The founding team's ability to execute the business plan and adapt to challenges is crucial. Seed investors often favor startups that can demonstrate a path to significant returns, with the potential for rapid growth and market disruption.

Do seed investors get diluted at Series A?

Yes, seed investors typically get diluted during a Series A funding round. Dilution occurs because new shares are issued to Series A investors, reducing the percentage ownership of existing shareholders, including seed investors.

However, the dilution can be mitigated by the increase in the company's valuation during the Series A round, meaning the value of the seed investors' remaining equity often increases despite the lower percentage ownership. Seed investors may have pro-rata rights allowing them to maintain their ownership percentage by participating in subsequent funding rounds, although this requires additional investment.