Money which you raise in the earliest stages of running a startup is called as a seed round finance. It usually represents the initial capital raised by a company to plan its growth charts. The financing you receive at this stage literally will be going to “plant the seeds” for your company’s upcoming future.
You might have got a catchy business plan, a fully-functional prototype, and even a few loyal paying customers onboard, and an amazing team who dedicates hours fine-tuning the product, but guess what? You still need money to hire full-time staff, purchase equipment, and rent out an office space. So, exactly how much money to raise in seed round of your startup?
The easiest answer, of course, is, “as much as you are able to”. Just imagine how easy things would get for you if you could raise enough seed stage capital that you would never have to go back to investors again, in order to raise more money for your startup company. In a best-case scenario, you should ask the investors to raise enough money so that you can reach profitability. But realistically, you are only looking to get enough money which would keep you afloat for the next 10 to 18 months after which point, yes, you’ll need to get back to investors and raise your Series A round of funding.
There are several benchmarks to examine how much money in the seed round a startup should raise. Assuming that you’re a technology company trying to bring a new product to market, you should at least count on having a team of 5 developers. Now, simply multiply this figure by $15,000 for every month of the runway you’ll have while trying to create your company. Using a few back-of-the-envelope calculations, you can immediately see that any five-person Silicon Valley startup is usually looking to raise between $1 million and $1.5 million for an 18-month runway period of their company. (Just simple math: $15,000 x 18 x 5 = $1.35 million to sustain) If you’re based in a more affordable techno hub, you might be able to play around these figures for yourself and realize that you need considerably less than $15,000 per month as a runway amount. But that’s what a ballpark figure does — it helps you to be in the right ballpark.
When all is said and ready to execute, the minimum amount to raise during a seed round stage typically goes around $600,000 (which works out well to afford 3 employees for 12 months). For any amount less than that, you can probably just go to your friends, family, and the deep-pocketed angel investors. If you’re looking to raise more than $1.5 million for your idea, you might need to redo your business plan to examine where you might be going wrong. (Most of the time, you just need to shift from your “best case” scenario to a “base case” scenario)
One of the most important things to keep in mind while raising a seed round is that it’s no longer an equity round. Simply speaking, it means that you and your partners (who own 100% of the company) no longer need to give up an equity stake so early in the lifecycle of your company. In Silicon Valley, seed rounds are typically financed alongside a convertible debt (or similar types of debt instruments that convert into equity at some later date if not repaid). Your Series A round will be your equity dilution round, so don’t worry, there will be plenty of opportunities in the future to give away ownership of your company.
Once you’ve raised your initial seed round funding, it’s time to get down to the serious business of pushing your company one step closer to profitability, (because that’s what you raised money for ?). The better the financial condition of your company after a period of 12 months, the better would be the terms for you to negotiate with VC investors later.
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