STARTUP FUNDING 101: SEED FUNDING
Prior to a Series A, Seed funding comes from Friends & Family, crowdfunding, Angels, early-stage VCs, incubators, accelerators.
SEED SERIES IS THE NEW SERIES A
The first round of funding used to be the Series A financing. As more capital has been allocated for early-stage startups, a funding round before the Series A has emerged known as the seed round, Series Seed or seed-stage investment.
Traditionally, seed funding came from Angel investors, friends and family, or the founders themselves. Today, however, entrepreneurs can obtain seed-stage funding from crowdfunding platforms, very early-stage VC firms, startup accelerators, incubators.
Seed funding is usually used to hire employees, develop products or services, and potentially generate revenue.
At the seed stage, we’re looking for a crazy idea that may have a significant chance of working. We want good teams. We don’t need complete teams or even complete plans, but the key technology risks of your approach—and the economic and market benefits, if it is successful—need to be identified. (Khosla Ventures).
Not only is there now a Seed Series before the Series A, there is also a pre-seed round before the Series Seed. This funding round usually comes from friends and family of the founder, early-stage Angel investors, and accelerators. Pre-seed funds are generally used to develop a prototype or hire a key team member.
There is a wide variety of seed sizes depending on the source. Angel funded seed rounds average $150K, while the median VC-backed seed rounds is more like $1.5M. The median deal size for seed companies is now $2.2M, with a median post money valuation of $10.7M.
SOURCES OF SEED FUNDING
There are various sources of seed-stage funding available for startups. Seed funding can be in the form of a donation, a pre-purchase of a product, equity, or debt.
> NON-EQUITY CROWDFUNDING
For startups with ideas or a prototype for a physical product, platforms such as Kickstarter and Indiegogo serve as a launchpad by allowing investors to make a donation in exchange for a promised reward or pre-order of the product. The investment is classified as a "donation" because unlike an actual purchase, the investor doesn't obtain ownership in anything and the startup generally isn't required to return the money if they ultimately fail to fully develop a product. These platforms usually also accept smaller donations from generous supporters without the expectation of receiving anything in return.
> EQUITY CROWDFUNDING
For startups without a physical product to sell, equity crowdfunding platforms, such as MicroVentures, WeFunder, Republic, and SeedInvest, enable investors to purchase shares or stock (a percentage of ownership equity) in a private company. Some startups use equity crowdfunding not just to raise money, but also to acquire brand advocates—as one is more likely to brag about a company they personally have a stake in.
> ANGEL INVESTORS / SUPER ANGELS / ANGEL FUNDS
There is little distinction between Angel investors and "super Angel investors" other than the fact that super Angels will generally invest larger amounts and lead or participate in follow on rounds.
Some Angels, like Jason Calacanis, have created a fund, called an Angel Fund, for individuals who are not necessarily Angel investors but want to invest their money alongside them. Co-investment Angel Funds, such as Alumni Group Ventures' First Check Fund and META's Angel Fund, allow groups of Angels to invest alongside another.
> MIRCRO VENTURE CAPITAL FIRMS
Micro VCs are institutional investors (funds consisting of other people's money) who invest in startups that are too small to attract the attention of larger VC firms. There are now more than 1,700 micro VC firms. Each of these firms is unique. Outbound Ventures invests in startups with adapt and self-aware founders focused on products and services for Millennials and Gen Z. The very active Kima Ventures backs 2 startups per week with money and mentorship and has had 45 exits. NYC based CoVenture also creates software for the companies they invest in. Some micro VC will continue to invest in subsequent rounds after the seed round.
> STARTUP INCUBATORS
Startup incubators, such as Y Combinator and TechStars, select a number of startups to participate in their flexible mentorship "startup bootcamps" and invest in a seed round in exchange for a small amount of equity. For those startups fortunate enough to participate in an incubator, the network and validation can be even more valuable than the initial investment.
> BUSINESS ACCELERATORS
Business accelerators provide early-stage companies with mentoring, capital and access to investors in exchange for equity.
XCR Labs in NYC provides retail and consumer goods startups with mentorship, access to capital, operational support and workspace at Parsons School of Design at the New School. Make in LA provides hardware startups with mentorship support and a state-of-the-art facility in Los Angeles, complete with rapid prototyping equipment to prepare for investor pitches.
> CORPORATE SEED FUNDS
Many mature public companies have seed funds, such as Intel Capital and Google Ventures that are reserved for startups working on innovative technologies which may be potential acquisition candidates later on.