Planting the Seeds of Success — A Beginner’s Guide to Seed Money
Let’s face it: Almost no entrepreneurs begin their path with a few million dollars in their pockets. We’ve all started small and grown over time. That is exactly where the concept of seed money comes into play. Some call it seed funding or seed capital, but the gist is the same — it is the initial fund raised until a business starts producing its income (and sometimes even afterwards).
However, when we talk about startups and innovation, this becomes more complicated. A business is usually profit-oriented from day one. You take your idea, turn it into a product or a service, and make all efforts necessary to generate revenue. Thus, you plan for the time between the birth of the idea and the point of profit, having a general scope of how much time this might take and how much money you will need to invest in this process.
The start of something new
Startups work differently. The primary goal is to make money, of course. However, that will probably not be your main target — at least not initially. Startups are usually focused \on standing out from the technologies and tools currently available. You must offer something to the world out there that does not already exist. In other words, you must find a way to disrupt how things are being done today.
Think of Waze, for example. The popular navigation app came as a response to drivers’ needs. They needed technology to tell them where to go without having to turn their gaze away from the road. They needed a tool to spot traffic and avoid it. They needed something to give them an evaluation of how long a certain ride will take. They needed all of that and more, and Waze was set up to provide.
Having said that, Waze is not a charity, and neither are Wolt, Telegram, Uber, Tinder, and all of the other tools we use every day. They make their money in different formats — some of them rely on ads, while others hope to be sold and ‘make an exit’ at some point. This can take years, and it can cost a whole lot of money.
That’s why for a startup, seed money is usually a stepping stone until a large-scale investor is found. In other words, this is ‘pocket money’ to get set up and begin your journey until your idea turns into something that catches the eyes of people with large sums of money.
You’re probably thinking now: Why not just go to the bank? Well, it’s not that simple. After the dot-com bubble burst, banks became especially wary of who they give money to. They will provide you loans only when they know how and when to get it back — and how much interest they will make.
Luckily, young entrepreneurs have several other options:
- Family and friends — the people around you are the most likely to be there for you during your first stages. While they might not always provide a lot, they will go the extra mile to help. Remember, this is an investment and not a loan, so you need to keep a plan in mind regarding how you repay these people, even if they are your mother or father.
- Crowdfunding — the internet has introduced a new way of accumulating seed money. You can post your goals and destinations on one of these popular websites and hope for the best. However, it would be best to remember that you are one of a lot there, and you need to know how to sell your idea and convince potential funders that your chances of success are high.
- Angel investors — this is also a recent new trend, which I have written about in the past. In short, we are talking about investors, such as myself, looking to use their funds and experience to help startups during their initial stages. In return, angel investors can expect an ROI (return on investment) or, alternatively, a share in the company.
One last thing before you go plant those seeds
A good seed money plan is one that can answer these three questions:
- How much money do you need? Seed money is usually good to start, but don’t count on raising millions of dollars before you even have an office or hire your first employee. Several tens of thousands of Dollars are adequate as a start.
- How long do you need it for? Seed money is supposed to get you through the first couple of years, with the assumption that afterwards you will already have something to show the world worth investing larger sums in. Don’t count on raising enough seed money for a decade and taking it slowly.
- How do you make sure you don’t waste it all too fast? It is tempting to take the money and, for example, rent a posh office in a building downtown. But you need to plan ahead to make sure the money you have can last you for a while because you never know how long it will take you to raise more. Do NOT count on luck or your personal charms. Work hard to have a product or tool which you believe can do the job of fundraising for you.