As an entrepreneur, you may have an idea or are in the process of brewing one. To succeed, a plan to procure funding is necessary right from the stage of inception. It is the dream of every entrepreneur to secure ‘seed funding.’
Many months of strategizing are invested to develop pitch decks and attract seed money.
It’s one of the key steps before your idea can take flight and achieve set milestones.
There are the initial exciting times when the entrepreneur teams up with a few like-minded people to design a logo and develop a website that elaborates on the idea. Investment is an important element to bring the idea into its physical reality.
Below, we list 10 sources of seed money — note that the first five require a company in existence with evidence of actual sales.
1. Angel investors
The first source of seed funding that often comes to mind is angel investors. The advantage with angels is that they not only invest, but also mentor you to steer your venture in the right direction.
The disadvantage is that their investment is less compared to venture capitalists but expect high returns.
Some angel investors appeared on India’s Shark Tank and are today much talked about. To name a few active ones in India:
- Ratan Tata
- Anupam Mittal
- Anjali Bansal
- Kunal Shah
- V. Mohandas Pai
Average Ticket Size – INR 3-20 Lakhs.
Tip: To approach them, prepare a pitch deck and a product prototype, contact the angel investor, seek an appointment and make an impressive presentation.
2. Angel networks and platforms
This is a pool of angel investors who can invest larger amounts of seed money and hedge risks. In exchange, the investor seeks equity ownership in the startup.
Popular Indian Angel Platforms – AngelList Venture, LetsVenture, Venture Catalysts, Indian Angel Network, Mumbai Angels, Chennai Angels, Hyderabad Angels, Calcutta Angels, Chandigarh Angels etc.
Average Ticket Size – USD 100-500k. Each firm allocates funds within a specific range.
3. Micro venture capitalists
These investors fund even lesser amounts and take an equity stake in return. Many micro VCs have shown an interest to partner with promising early stage founders as well. Pre-seed funding aspirants might find it useful to tap them.
Popular Indian Micro VCs – iSeed Ventures, Fluid Ventures, 100X.VC, Pentathlon Ventures
Average Ticket Size – $60-70 mn
4. Venture capitalists
These firms are specifically set up to provide seed money to promising start-ups. Series A seed funding is typically where the VCs enter and take their pick.
VC funding is often sizeable and meant for the growth and expansion of the start-up firm.
The emphasis here is on steady growth and sustainable development. In return VCs seek equity or equity-linked instruments. The VC opts out when the company releases an IPO or otherwise gets acquired.
Popular Indian VCs – Sequoia India, Blume Ventures, Eight Roads, Tiger Global Management, Lightspeed India Partners, IvyCap Ventures, Nexus Venture Partners, Westbridge Capital, India Quotient, Lightbox, Omnivore.
Average Ticket Size – Approximately $400k-600k mn
5. Corporate venture capital
CVCs comprise large multinationals investing their corporate funds into various small, innovative start-up firms. Association with big names is a definite advantage for the start-up that is looking to market itself.
The CVC also lends its expertise in various areas including:
- Future vision and direction
- Developing success strategies
- Even a line of credit
In exchange CVCs claim equity stake in the company.
Popular Indian CVCs – Mahindra Partners, Dream Capital, Samsung Venture Investment, Unilever Ventures, TVS Capital Funds (P) Ltd, Intel Capital.
Average Ticket Size – Unicorns such as PharmEasy, Moglix, Grofers entered the valuation league of $1 billion in 2021 according to an article in VCCircle.
6. Accelerators and incubators
All the above forms of funding require a company in existence with set criteria, including actual sales.
They are not only provided funding but also a networking platform to connect with investors, mentors and other startups. In return the accelerator/incubator takes equity stakes in the company. These are run by individuals or large corporations and big tech firms.
Most incubators are directly or indirectly supported by the government to in turn support the entrepreneur.
Popular Indian Accelerators and Incubators – GSF Accelerator, Microsoft Accelerator, JioNext, Prime Venture Partners, iCreate, Villgro, Amity Innovation Incubator.
Average Ticket Size – 45 lakhs to 1-1.5 crore.
7. Family offices
Another source of seed funding can sometimes be found closer to home.
India is a family-oriented nation with businesses passed down families through generations. Indian startups have the advantage of expertise from family-run businesses that have a wealth of knowledge and experience to help the budding entrepreneur.
While family businesses are known for their conservative approaches, the next gen is keen to break stereotypes and invest in new ventures. This doesn’t mean they reject the accumulated wisdom of their families, but rather seek to combine age old business practices with new strategies.
Family businesses are known to be more patient with a new company than angel investors, which might come as a relief to a start-up.
India has about 140 family offices heavily invested in the start-up space.
Popular Family Businesses – Azim Premji of Wipro, Anirudh Damani of K.Damani & Damani Group, Burman Family Office (investor in Dabur India), Bajaj Auto, DLF India, Havells, and Haldirams.
Average Ticket Size – Indian Family Businesses are creating a significant mark in the entrepreneurial space. They are expected to contribute 30% of the estimated $100 bn to be raised by Indian start-ups in 2025.
8. Government grants and funds
The year 2016 opened additional avenues for entrepreneurs to explore besides angel investors and VCs.
This program comes with a slew of benefits such as:
- An 80% rebate on patent costs
- Income tax exemption for the first three years for registrants
Loans are disbursed via the Small Industries Development Bank of India (SIDBI) Fund of Funds Scheme, which in turn invests in venture capital and alternative investment funds (AIF), which invest in start-ups.
Early stage start-ups can also avail Start-up India Seed Fund scheme.
Average Ticket Size – Overall the government of India has allocated INR 1000 cr for Fund of Funds for start-ups and INR 283.5 cr for Start-up India Seed Fund Scheme (SISFS) in 2022.
9. Venture Debt Funds
This is a hybrid scheme offered by non-banking financial corporations (NBFCs) called venture debt funds that provide debt finance to VC-backed startups.
Bank loans or equity are not a viable funding option when a startup is planning on expansion and requires working capital, as equity is an expensive source of funding for startups. In return, the venture debt funds take non-convertible debentures (NCDs) and equity warrants.
Popular Indian Debt Funds – Trifecta Capital, Stride Ventures, BlackSoil Group, Alteria Capital, and Nothern Arc.
Average Ticket Size – Overall figures – According to a 2022 Stride Ventures reports debt funds have raised about $538 mn, a jump amounting to nearly double the previous year.
Other seed funding options for Indian start-ups include conventional loans through banks.
They offer different types of loans for various business requirements such as:
- Working capital loans
- Equipment loans
- Start-up business loans
There are loans corresponding to each stage in the business.
MSME loans are also popular for medium and small to medium businesses. There are also several schemes and exemptions that MSMEs can avail.
Popular Indian Banks – Fullerton India, Omozing and NBFCs (Non-Banking Financial Company) offering loans to start-ups.
Average Ticket Size – The MSME average ticket size is INR 20 -45 lakhs.
Now that we’ve listed 10 sources of seed funding, let’s take a look at the typical funding sequence for a start-up.
Pre-seed funding – a safe bet!
The very first step in financing — pre-seed funding — involves almost no paperwork and is unofficial. Its most definitely a safe bet, with no serious consequences attached and here’s why:
In this stage, the founders may invest their personal savings, also known as bootstrapping.
Alternately, they could borrow from friends, family or supporters who are happy to see them succeed. They may not aspire for a share in your company, but simply expect you return their money at a mutually agreed time.
In pre-seed funding, the entrepreneur is armed with nothing much except:
- A unique business idea
- A consumer problem their idea will solve
- Some initial data to showcase the business’s prospects and applicability with the help of a business model
- Future predictions of growth
There could also be a few sales and customer feedback to validate the power of the business idea.
A few key employees or the founders themselves begin working with a prototype to give the idea an existence. The founders may include a high net worth individual as a partner.
On a rare occurrence, angel investors invest at the pre-seed funding stage. They provide financial backing, knowledge and expertise to help you grow. They may be individuals or a network of individuals with family connections and/or are experienced entrepreneurs who can advise a new business to make the right moves.
No wonder they are termed angels, who help avoid pitfalls and genuinely root for your success.
However angel investors and VCs usually enter the picture only when there is a good product-market fit and a revenue model in place.
Some other forms of pre-seed money include pitch competitions, start-up incubators, and government and business grants for early-stage start-ups.
Seed funding – wheels in motion!
For start-ups to grow into successful businesses, a corpus fund is required to implement ideas.
Because banks usually require security on loans (such as property), this is often not a viable option. This forces the entrepreneur to raise capital from investors or venture capitalists.
The initial amount raised through such endeavors is referred to as ‘seed funding.’
It is the first official funding stage to invest in:
- Market research
- Pay salaries
- Start production
- Market creation/penetration
- Brand creation
- Team growth
This round will find angel investors and venture capital firms vying for equity stake in promising companies.
Corporate seed funds may also be tapped to raise money from large firms in exchange for equity stakes. Accelerators are companies that assist in high growth for a fee or equity exchange.
How to ace this stage?
Focus on accumulated market data. The job of the venture founders and managerial staff is to:
- Figure out how the product or service appeals to the target audience
- Smoothen out technical glitches
- Ensure problem-solution fit
- Attract good sales
Tip: Most entrepreneurs fail to convince investors of long-term growth prospects. Focus on how and in what direction you choose to take the company in a five, 10, 15-year projection. How do you plan to expand?
The stairway to success – Series A, B, C.
The subsequent stages of seed funding are Series A, B and C, which must be passed through in order:
- Series A: This is the second stage of funding where hopeful applicants have a working product or service. This phase is flooded by angel investors and venture capitalists. The aim is to create a substantial user base and establish a strong success track record that helps position the company for a larger scale of growth.
- Series B: This stage of seed funding supports increasing production and meeting market demands. Series B involves attracting a key investor who can in turn attract better investments. Though similar to the previous stage, here risk investors specializing in later-stage investment are included as potential partners, along with the ones in Stage A. It is easy to assume that revenue generated is good enough, not requiring further investment. However if your aim is market dominance, series B is an important step. Cash outflow for further expansion and market penetration may be a staggering unanticipated figure. It is important to take the first plunge, ahead of competitors and thereby capture the market. Capital plays a huge role in it. Tip: Focus on ways of market expansion, exploring new segments and untapped customer bases. Radical expansion via acquiring companies is a way to thwart competition.
- Series C: The fourth stage is meant for successful start-ups poised for very large-scale expansion. For example, launching a product at an international level. It could involve several other major acquisitions. Very few start-ups climb to such heights. The parameters for entry into series A, B and C and the capital they can raise can vary. What remains constant is the steady increase in the size of capital with the completion of each round.
Start-up funding in India
The Indian start-up ecosystem is bustling with activity. After the IT boom, where India emerged as a top player, enterpreneurship has captured the interest and imagination of young India.
New graduates, post-graduates or even the simple, uneducated (but supremely talented) Indians risk everything to contribute to a better India with novel solutions, inventions and services.
As of July 2022, India is home to 105 unicorns with a total valuation of nearly $340 billion.
In conclusion, India is now the third-largest start-up hub in the world. The government, large corporations and even smaller companies are participating in building robust businesses that can contribute to a strong economy, creating a more conscious, integrated world.
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