Good seed makes for a good crop. That’s what they say; and they’re right. Quite the same happens when it comes to a new venture, such as a startup business. And, to build a successful business — or increase the chances of building one — you need a good idea and a good team. You also need to fuel up the engine you’re building with some good seed capital. And that’s before you hit the ground, running as fast as you can.
What is seed capital?
Good question! Here’s a definition from Investopedia:
Seed capital is the money raised to begin developing an idea for a business or a new product.
But, what makes a ‘good’ seed capital? And how can you get one? Even better questions. That’s what we’ll try to explain below.
First, let’s start with why; same as the title of the famous book suggests. Let’s try to get some inspiration and then take action, as the book promises.
Why do I need seed capital for my startup venture?
I’m not sure how many of you find this question interesting. But let’s have it answered for the sake of those who do 😉. So here we are:
Seed capital a necessary condition to start your journey
Contrary to the famous saying that it’s only with money that the world goes round and the no-more inspiring stories of successful startups that started in garages with no seed capital at all, it’s somewhere in the middle that the truth lies most of the time. And the truth, here, is that you cannot start a business with no money at all; but you only need a reasonable amount of money to get off the ground. To put it another way, those garage startup stories motivated hundreds of people to chase a dream and make it true; and have also led thousands of others — to say the least — to delusion and failure. All in all, seed capital is not an option. You do need to get some to get your startup started. So, go for it!
How will Ι use it?
Though it’s another trivial question with obvious answers, let’s have it answered, as it helps organize your next steps and stay alert as to how you’ll handle difficulties.
So, more or less, with seed capital you’re going to buy yourself — and your team — some time to implement your ideas. Time that is indeed needed, before your business becomes cash flow positive and you’re finally able to stand on your own feet. Keep in mind that it takes way longer till you finally get to the breakeven point — if at all — and start planning the repayment of the initial investment. Yes, we’re talking about the one that you’re currently craving for. But these things are to be discussed later. Till these days come, you’re going to need some help to cover your expenses and hires in the course of time:
What you’ll need
- Office space. Even if you’re starting as a team of two entrepreneurs sooner or later, your team is going to grow; so, rent will be another headache you’ll have to deal with.
- Payroll. Seed capital is important, as it will allow you to be fully-devoted to your new venture. Startup building is not a side project or at least it shouldn’t be considered one.
- Cost of buying and maintaining fundamental equipment.
- Additional expenses, such as subscriptions, licenses on essential services that will help you be more efficient. Keep in mind that you need to resolve any problems and make it easier for your team to focus on real problems that have to do with the product you’re building. To achieve that, you’ll need to make the best of available automation tools.
- Initial marketing efforts, such as ad campaigns, even though they’re going to be limited; at least in the beginning.
- Extra hiring that you’ll need to do, sooner or later.
- Operational expenses, such as legal, IT and accounting services.
Having a well-thought-out plan about how you’re going to deal with all of the above is of vital importance for your startup. One path to choose is to look for a noise-free environment that will provide you with all the facilities; such as a startup accelerator. And, another way to secure seed capital is by opting for one of the alternatives described below.
What are the alternatives when looking for seed capital?
As Alejandro Cremades suggests in the famous book The Art of Startup Fundraising, there are at least 10 different sources of funding for startups; from seed money to working capital. Here’s a list:
- Friends and family
- Family Offices
- Credit Cards
- Business Loans
- Angel Investors and Super Angels
- Angel Groups
- Venture Capital
- Venture Debt
In his book, he offers an in-depth analysis of each option. In particular, he suggests insightful ways to prepare for negotiations; and he also examines how each one of them will affect your startup’s future, in terms of legal commitment and in general.
In your startup’s best interests…
Needless to say, in making a decision that will be in your startup’s best interests, you need to thoroughly examine all the parameters involved. This way, you’ll opt for a good seed capital agreement. If you’re currently in this position, stay with us. There will be an upcoming post here, on our blog, in which we’ll explain in detail all the prerequisites necessary to get you to seed funding.
For the time being, let’s focus on why you need to plan and work towards raising seed capital for your startup. In a nutshell, raising seed capital will save you valuable time and resources, as explained.
With this purpose in mind, let’s look at things the other way around, and let’s say that seed capital is just an option. And that you and your team can cope without fundraising.
Let’s take a look at a hypothetical scenario where you’re running out of money, either because you didn’t manage to draft a reasonable plan as long as financials are considered, or just because you underestimated the importance of raising seed capital; and capital in general.
Running out of ‘time’
In “The Art of Startup Fundraising”, the author warns entrepreneurs not to underestimate the need for capital; and he aptly states that:
Nothing will kill your venture and dream faster than running out of cash
Just think of yourself being in that position for a while, and you’ll understand the importance of raising seed capital for your venture (the right way). If it’s not that easy, let us help a little bit. Here’s what you’re going to deal with:
- You’ll be prioritizing based on money, not on what is really important to do next.
- Gradually you’re going to be forced to let partners go…
- And finally, you’ll halt activities, once and for all.
All in all, you’ll have to face disappointment, wasted efforts and dreams that didn’t come true.
When it comes to seed capital, go for it!
Cash, money, seed capital whatever you want to call it, it’s the fuel of the engine you’re building. And though it’s only meant to speed up the engine and not to build it, it is undoubtedly one of the ingredients that you’ll need to have on the table, in order to create your own recipe for success.You’ll also need passion, resilience, soft skills and way too many virtues in your arsenal. And, on the way to get them, you will be helping yourself and your team grow.