If your business idea is gaining a lot of interest and you already have a product with proof of concept, you are most likely at the stage where you need funding to expand your line and grow it to the next level. Early-stage funding is one of the hurdles that every new company faces, and knowing what to expect can help entrepreneurs tackle it much better.
The easiest way to get seed feeding is from friends and family. Once you benefit from the company, they stand to gain too right. It sounds simple enough, but it can be a lot harder than it sounds. Finding outside investors, while it can be a tedious task, can be a great way to give your business the edge it requires and boost your confidence.
According to data available from the National Angel Capital Organisation, investments from friends and family usually range from $2000 to $300,000. After a round of friends and family funding the business, companies head out to seek seed funding from other investors.
Angel investors usually offer more substantial amounts of funding than friends or family might and help the companies in ways other than capital investment. Angel funding from groups can bring in more investments and raise the overall profile of a young company.
Angel investors vs Venture capitalists
Essentially, angel investors are the opposite of venture capitalists. Angel investors, also known as informal investors, angel funders, private investors, seed investors or business angels, are affluent individuals who inject capital for startups in exchange for ownership equity or convertible debt.
The venture capitalists usually arrive on the scene only after the company is already into its seed funding and look at early-stage investments. Venture capital investments start at around $2 million and could go up a lot higher depending on the company’s stage of funding and potential.
However, receiving funding from venture capitalists isn’t for every type of company. Not all startups can take venture capital funding in their seed stage. It is suited for a business that has high growth potential and needs equity capital to reach scale. Venture capital funding is not the way to go for service-related companies or restaurants, experts said. They also added that it was more suited for startups in the technology sector.
However, just being a tech company is not enough to get venture capitalists interested in your business. Potential investors look at all aspects of the company, including proof of concept, a good team, and past numbers and projections for the future. If the VCs are satisfied with all of these, they may consider looking at your company as a serious investment at the seed funding stage.
Experts say that seed funding in Canada average around US$1 million, and tech companies routinely seed funding rounds of around $2 million. The amount of funding received also depends on the seed funding stage and the entrepreneur’s ability to convince the venture capitalists. Usually, the later the funding round was, the higher the amount raised, experts said.
Sometimes when there is more interest than anticipated, there can be an increase in the amount raised. Companies have often started a round of funding looking for around $1.5 million but received a lot of interest and ended up as a $2.5 million seed round, another expert said.
To be a unicorn in the world of startups, it is essential to start your seed round of funding in a well-prepared phase. Cold calling someone is unlikely to work when looking for investments of this scale, especially at the seed funding stage. Receiving an introduction to a potential investor from someone who knows them and believes in your company could work wonders in helping position your business as a company to look at.
A unicorn is a startup company valued at over $1 billion. The term was coined in 2013 by venture capitalist Aileen Lee, choosing the mythical animal to represent such successful ventures’ statistical rarity.
Like in life, in early-stage seed funding, too, finding the best investors is all about making and maintaining relationships. People are more likely to trust an entrepreneur they feel a personal connection with.