Explorando el Ecosistema de Innovación Financiera Global en Colombia Colombia sobresale en la revolución tecnológica dentro…
Seed funding for startups has exploded in the past decade and become an asset class of its own, making these investments part of the venture capital mainstream. While it is potentially lucrative, it also comes with big risks.
Seed money definition
Seed money is a form of capital invested in a startup in exchange for an equity stake or convertible stocks in the company. It is an early investment to support the business until it can generate cash of its own. Seed money options often include friends and family funding, seed venture capital funds, angel funding, and crowdfunding.
Seed funding helps a company to finance its first steps such as market research and product development. With this financing, a company can determine its target demographic and develop its final products by employing the right team.
It involves a higher risk than normal venture capital funding, since there are no existing projects for the investor to evaluate beforehand. However, the median seed deal has grown from US$1.5 million to US$4 million in recent years, and the average is from US$1.7 million to US$4.6 million. There is still a great deal of variance though: in 2020, seed funding from these investors ranged from US$700,000 to US$22 million.
How to invest seed money
While anyone can invest in startups via the many crowdfunding sites offering a curated selection of companies, investing seed money is a process you should be prepared for.
Investing in startups gives you a ringside seat to solutions for challenging problems or the development of innovative technologies in an industry. You may decide to invest because you see the growth potential of the company and you believe in the new idea. It may simply be because of personal connections or a sense of fulfillment. How you approach investing will be unique to you and your financial situation.
- Make sure you structure the investment deal properly. This is a long-term business relationship.
- Calculate your ROI. Return on investment is a key financial metric when evaluating an investment or comparing several different opportunities. A minimum respectable return is between 20 and 25 percent per year.
- Know the exit strategy. This can give you an idea of how far ahead the entrepreneur has thought.
- Be aware of your own exit strategy. It is likely that by the time of the exit, you will own half of the business. Therefore, it is just as important to sell your portion of a company in as timely a manner as it was to buy into it.
- Do the research. Immerse yourself in your niche industry. It is important to have your finger on the pulse of a particular industry.
How to find startups looking for seed money
There are many startups searching for capital and a third-party platform like Finnovating can help you find startups from all over the world.
Before choosing a company to invest in however, you should be aware of the following.
Is it a field you’re familiar with? Your own research into a particular market will enable you to tell whether the startup knows their area. Ideally, they should be highly knowledgeable in the field, and be well-informed of the current industry climate and trends.
Do you have good chemistry? You are gaining a long-term business partner, so a healthy chemistry is important. You should also sense passion in the team, as this will be essential to getting an idea off the ground.
Can they provide exact numbers? They should be able to ask their investors for the exact amounts they need for their business and project the use of those funds to grow the company. They should have a solid financial plan with market trends in mind.
Are their expectations realistic and do they know the space they are operating in? They should be concentrating on how to solve a specific problem in a market they know. Identifying a proven business model but attempting to replicate it in a new region can be a mistake.
Tangible deadlines and timelines not only show that the entrepreneur is serious about getting the necessary funding and being organized, but also that they are committed to the venture for the long-term. They will also need a marketing strategy, plans for distribution and sales channels.
When deciding to invest, talk to your financial advisor and invest small amounts that you are prepared to lose. Finnovating makes it much easier to find seed money thanks to its discovery tool that helps you connect with international startups from anywhere in the world. In addition, you can identify which startups are looking for investment, thanks to the «open-to-capital» button that can be activated by a startup that is open to investment.