The market for investing in startups behaves differently than those for equities or bonds – those of the traditional markets.But just as with these markets, the venture ecosystem experiences highs and lows. Investors tend to pile into angel and venture investing when the market is rife with acquisitions, and huge valuations. But by only investing during peak times, investors miss not only the opportunity to buy into startups at lower valuations, but they also may miss the chance to invest early in the next big startup such as Airbnb, Uber etc.
What is seed funding and why is it essential to a startup?
Seed funding is the early-stage investment that a startup needs to get off the ground and gain some traction. It is a very crucial stage in the journey of a startup as it allows them to transform, work on their product or idea with the required funding, develop a team and look into all the other aspects that are responsible for the functioning of a company.
In most cases, the amount of money needed is more than the startup has to begin with. Here is where seed capital from outside sources, such as crowdfunding, venture capitalists, bank loans and angel investors, come into play.
Seed money or seed capital is very vital in changing the facet of a startup in aiding the startup in transforming an idea into a physical entity. But it is very essential that a startup receives seed funding at the right stage by an investor. When to invest in a startup is crucial to defining the health of the company as a whole.
When is the right time to seed fund a startup?
As a startup it is always the right time for them to seek out investors and raise funds for their company. But, there are a few things that an investor should keep in mind to increase their chances of getting what they want from who they want. An investor must first know if it the startup is ready for seed-stage financing or not. It is crucial, as an investor to only invest in opportunities that are good both strategically as well as financially.
- Ensuring that the team is right
They should ensure that the human resources in the start up at that point in time are people that are right to execute the idea or product the startup might be visioning in mind. Not only looking out for the right people and team an investor should check if the people in the company are being treated with respect, loyalty and care so that they are all just as invested as the founders are.
- Checking if the Startup has Worked With Industry Experts
Take valuable feedback from experts in the field including advisors, angels, partners and industry players can help investors make a decision on whether it is the right time to invest in the start up or not. This way, startups can improve the product or idea before taking it to the market and investors can hold out on parting with their funds just yet.
- Availability of a prototype
Investors should check what stage of production the product or software the startup is creating is in. There should at least be a working prototype available before investors jump in.
- Checking to see if the startup has done their due diligence
In the investors meeting investors should see if the startups have done their research about the potential investors. Not having done their due diligence showcases a lack of preparedness letting investors know the startups might not be fully ready just yet and it might not be the right time to invest.
- Has the product been tested
As an investor it is always good to check if the product has been tested before providing the startup with seed capital. Investors should check if market research has been done by the startup. Do they know the customers’ needs and behaviour letting them present a real-world scenario of the effectiveness of the product. Market research should always be carried out by the startup before the product launch. As in investor you should ensure the startup can replicate the sales process and cycle in the future so the startup can get a better idea of the issues they might face and be able to tackle them accordingly.
- Seeing if the startup has domain expertise and experience
The startup should know the ins and outs of the space that they’re operating in. An investor should see if the startup has the experience required to succeed in the field they’re venturing into so they can set up and operate at a quick pace and directs to build successful startups
- Evaluating the startup before kick off
Before diving into an investment make sure you do a speedy evaluation that will benefit both the organisation as well as the investors as it’ll serve as a validation exercise for the startup while also helping in building a better relationship with the investors.
- Assessing how mature the startup is
Before spending substantial time and energy in evaluating the start up, investors need to define how much effort will be needed for the Investment Evaluation by assessing how mature the startup is, which in turn affects how much resources an investor will have to invest in the venture.
Ventures at different maturity levels would require a different validation track. Startups are naturally risky, and would consequently need more time spent on validation of various aspects in comparison to Scaleups for instance, that have found a market fit and are only seeking to grow.
- Seeing where the startup is in terms of venture validation
Typically, for an early stage startup, a substantial amount of time and resources would be spent validating whether the problem selected is really worth solving. Once the problem space has been analyzed, efforts can be focused on determining if the ventures intended solution solves the problem in an effective and in a scalable way. As an investor you need to decide what time is the most suitable for you to invest in depending on the amount of funding you aim to provide.
- Significant Market size
Most investors are looking for a business opportunity with growth potential. Accordingly, if the market of a startup is very nearby, their growth is limited. A startup needs to have a market with significant reach, at least regionally depending upon the nature of its product. A large enough market where the economies of scale can be incorporated into the operations to increase margins and profits will be needed.
The circumstances of where a startup is at greatly determine when an investor should invest in it. It is said as an investor you should only invest in a startup if you’re prepared to lose 100% of what you’re staking. As startups are such a risky investment the timing at which investors provide them with seed capital is very crucial to both the profits the investors make as well as to ensure the start-up flourishes and transforms successfully.
Author : Namita Gupta is a content writer with Axiswebart who’s been working with other well renowned organizations too where she is writing and handling content strategies.
