Startups typically raise seed funding during the early stages of their development, usually after they have formed a viable business idea and built a minimum viable product (MVP). Seed funding is the initial capital raised to support the startup’s operations and further develop their product or service
The timing of a startup’s seed funding round can vary depending on various factors, including the industry, business model, and market conditions. However, seed funding rounds often take place in the following scenarios:
- Pre-seed: Some startups raise pre-seed funding even before they have a fully functional product or proof of concept. This early-stage funding is typically obtained from friends, family, or angel investors who believe in the startup’s potential.
- Idea validation: Once a startup has a clear business idea and a well-defined value proposition, they may seek seed funding to validate their concept. This funding can be used to conduct market research, build a prototype, or run initial pilot tests to gather data and demonstrate the viability of their idea.
- MVP development: Many startups raise seed funding after developing an MVP. This allows them to showcase their product’s functionality and potential to investors. Seed funding at this stage is often used to refine the product, conduct further testing, and build the initial customer base.
- Market entry: Startups may also raise seed funding when they are ready to enter the market and scale their operations. This funding can be used for marketing and customer acquisition, expanding the team, and supporting early-stage growth.
Seed funding is typically provided by angel investors, early-stage venture capital firms, or through crowdfunding platforms. The amount raised in a seed round can vary widely, depending on the startup’s needs and the investors involved.
It is important to note that these are general guidelines, and the fundraising journey can differ for each startup depending on their unique circumstances and market conditions.
When a startup has a persuasive reason for why an investor should invest in their business, it’s the ideal time to reach out to investors. The seed stage doesn’t involve many monetary transactions to support the startup’s claim, so it’s best to contact investors when these criteria are met:
- The startup’s idea and problem-solution hypothesis are validated
- The opportunity is large enough to sustain long-term growth
- The entire team is on board (seed money is typically not used for hiring a new CTO or CEO)
- The startup has gained real customer traction and plans to expand its offerings to a wider audience.
When starting a business, seed funding can provide a financial boost to prove that your concept is viable. Investors in the seed stage typically seek out companies with credibility and a product-market fit. This is an opportune time to demonstrate that your product or service can gain initial traction in your target market.
It’s crucial to clarify whether your product meets customer needs and if customers are already adopting it. Additionally, evidence that your customer adoption rate is increasing over time can indicate a positive trajectory to potential seed investors and the potential for significant returns on investment.
Start-ups can choose to raise seed funding at various stages, but it’s suggested to aim for a seed round when annual recurring revenue is less than $3 million. The average amount of funding raised in a seed round is $2.2 million, but this may vary from $100,000 to $5 million.
As a founder, it’s up to you to determine the precise amount of funding needed. Generally, it’s recommended to raise enough to reach profitability or your next funding milestone with ease, based on a detailed understanding of your business operations.
Average seed round by industry – examples
It’s not always necessary to raise the maximum amount possible during the seed round. The average seed round has increased significantly over the last ten years and currently ranges from $1-$4 million.
In Europe, healthtech and software firms raised the most in seed funding, with fintech seeing particularly high numbers. Globally, the average seed funding round for SaaS was $2.1 million in May 2021, although the actual average may be higher due to companies that chose not to disclose their funding amounts.
