How to Get Seed Funding for Your StartUps

Seed funding is the funds that startups get at the initial level to help them convert their idea into reality. It is generally used to create a prototype of the idea to prove its functionality and potential in the market. It is used to make the product reach a stage where it can attract venture capitalists and other investors for further rounds of investing.

Features of Seed Funding:

1. It is the money or capital raised to start working on a product or an idea.
2. Usually raised in exchange for equity in the company.
3. Limited funding to start working on the idea or product.
4. It is raised at a very early stage.
5. This is followed by other rounds with venture capitalists to attract more funds.

There are many ways to get seed funding for a startup. Startups should be aware of the options available to them to raise the seed funds for the initial requirements.

Types of Seed Funding for Startups are:

• Personal Savings:

Founders can use their own personal savings or funds from the family as initial funding in their startups. In this option, there is no pressure on the founder to return the borrowed money. Further, there is no intervention of the borrower in business and no answerability to them at this stage. It is also known as bootstrapping.

• Incubators:

Incubators are generally a group of people that helps startups in the early stages. They help solve the problems of the startup be its seed funding, workspaces, training, mentoring. Some of the incubators are working as not-for-profit organizations also and helping the startups, these contain mostly business schools’ students and alumni.

Government is also providing the incubators free of cost for helping startups in growing their ideas. As the number of startups increases, the number of incubators is also growing. Some of the known incubators in India are CIIE IIMA, IAN incubator, Sine, STEP, Nsrcel, CEI IIMC.

• Corporate Seed Funds:

Many corporates are also interested in investing seed money. Some of the investment arms of big corporates like google, apple, intel have a dedicated setup to help the startups in their funding and operations.

• Crowdfunding:

In crowdfunding, funds are collected from a large number of people in small amounts with the help of the internet. Social media and crowdfunding platforms are used to raise funds. Founders can pitch their idea to a large number of investors to raise higher funds.

Types of Crowdfunding

1. Donation-based Crowdfunding
2. Rewards-based Crowdfunding
3. Debt security Crowdfunding
4. Profit sharing Crowdfunding
5. Equity-based Crowdfunding

It is an innovative way of raising funds for new ideas, businesses, and projects. Crowdfunding platforms work as an aggregator between fundraisers and the crowd.

• Angel Investors:

Angel investors are high net worth individuals who provide financial assistance to startups. They generally invest in business at the initial phase in return for certain equity against the investment. Financing by angel investors is less risky than debt financing as the startups are not liable to pay the same being equity in nature.

Angel investors generally look for small businesses looking for expansion and have a potential for high growth.

• Accelerators:

Unlike Incubators, accelerators support businesses that already have developed a minimum viable product and are looking for a fast track growth of their business. They provide the business with the funds, mentorship, resources, and connections that help them accelerate their growth.

Accelerators work on scaling the business by finding the best product-market fit. Accelerators provide startups with great networking opportunities with well-established entities. Startups looking for funds and mentorship for fast-paced growth can apply to accelerators, based on the assessment, interview, and evaluation by them, if found fit, startups may be accepted to work with accelerators.

• Debt Funds:

Startups can also get debt funding from interested investors. The advantage of debt funding is that startups don’t need to dilute the equity stake at the initial stage if not required. The disadvantage of debt is that it is the liability that needs to be paid periodically at the specified time intervals and cannot be avoided as the case is in equity.

• Convertible Securities:

These are the investments that are initially provided in the form of loans or debt and then convertible to equity depending upon certain events in the future. It is usually considered as a safer option for the investor where he gets the benefit of both loan and equity.

Read Also: How to Raise Funds for a StartUp

Government Initiatives

The government of India also launched the ‘Startup Seed Fund scheme’ to provide financial assistance to startups for proof of concept, prototype development, product trials, market entry, and commercialization.

The need for this scheme arises because funding from angel investors and venture capital firms becomes available to startups only after the proof of concept has been provided. Similarly, banks provide loans only to asset-backed applicants. Therefore, it is essential to provide seed funding to startups with an innovative idea to conduct proof of concept trials.

Features Of Startup India Seed Fund Scheme:

1. Year-round ‘Call for Applications’ for Incubators and Startups
2. Sector-agnostic
3. No mandatory physical incubation
4. PAN-India startup program
5. Startups can apply to 3 incubators simultaneously

Startup India Registration

Eligibility Criteria for Startup India Seed Fund Scheme:

1. A startup, recognized by DPIIT, incorporated not more than 2 years ago at the time of application.
2. The startup must have a business idea to develop a product or a service with a market fit, viable commercialization, and scope of scaling.
3. The startup should be using technology in its core product or service, business model, distribution model, or methodology to solve the problem being targeted.
4. Preference would be given to startups creating innovative solutions in sectors such as social impact, waste management, water management, financial inclusion, education, agriculture, food processing, biotechnology, healthcare, energy, mobility, defense, space, railways, oil and gas, textiles, etc.
5. Startup should not have received more than Rs 10 lakh of monetary support under any other Central or State Government scheme. This does not include prize money from competitions and grand challenges, subsidized working space, founder monthly allowance, access to labs, or access to prototyping facility.
6. Shareholding by Indian promoters in the startup should be at least 51% at the time of application to the incubator for the scheme, as per Companies Act, 2013 and SEBI (ICDR) Regulations, 2018.
7. A startup applicant can avail of seed support in the form of grants and debt/convertible debentures each once as per the guidelines of the scheme.