Difference Between Seed Funding & Early-Stage Funding
A startup may require several rounds of financing before it can generate sufficient cash flow from sales to finance operations. The amounts and sources for each round vary by company and industry. The earliest funding rounds are seed and early-stage funding. Companies need these funds to support operations, such as product development, administration and marketing.
Basics"Inc." magazine defines seed funding as the earliest round of capital for a startup company. FundingSavvy, a funding resource website, defines early-stage funding as a startup company's first round of substantial funding. Early-stage funding usually consists of two parts, commonly known as Series A and Series B financing. Seed funding allows a startup to develop a prototype product and generate sufficient investor interest for successive financing rounds. Early-stage funding allows additional operational flexibility over the medium to long term.
SourcesThe sources of seed funding include the founders' personal savings and investments from family and friends. Banks usually do not lend to startup companies because of the high risks, and venture capitalists tend to stay away from seed funding. However, a startup entrepreneur might have more success with angel investors and private equity funds. Angels are former entrepreneurs and other wealthy investors who get involved in some startup companies. Private equity funds pool money from individuals and institutions to invest in high-growth companies. Early-stage funding typically comes from venture capitalists, who may also bring experience and industry contacts that can help a startup rapidly grow its business.
AmountsMontreal-based venture capitalist Ben Yoskovitz suggests that seed funding typically ranges from $25,000 to $1 million. A common funding structure is convertible debt, which is debt that is exchangeable for stock within a specified period. FundingSavvy.com suggests that early-stage Series A funding is in the $2 million to $5 million range, while Series B funding is in the $5 million to $10 million range. The high-risk nature of seed funding increases the cost of capital, which means that investors may demand a larger share of the startup. Therefore, startups should secure only enough seed funding to continue operations and develop a viable prototype, thus preserving enough equity in the company to satisfy the founders and the early investors.
Considerations: ValuationStartup valuation is important because it determines the return on investment. If a startup company's valuation were $1 million before seed funding of $1 million, then the founders and seed investors would each own 50 percent of the company. If the company raises additional funds, the founders' share would diminish further. Several ways to increase a startup company's valuation include placing a fair market value on physical assets and assigning values to paid professionals and patent applications. Investors generally estimate what a startup could be worth in five years and then divide that amount by 10 to arrive at the current valuation.
Source:http://smallbusiness.chron.com/difference-between-seed-funding-earlystage-funding-33038.html
