How to Raise Seed Money

The capital loaned out by investors to help a new business get off the ground is often referred to as “seed money.” If you’re a hopeful business owner, you can begin seeking out potential investors by talking to your friends and family, networking with other interested parties, and attending startup events. In order to earn the confidence (and therefore the money) of your investors, you’ll need to be able to show them that you have an actionable plan in place for turning your idea into a profitable operation.

EditSteps

EditUtilizing Social Networks and Government Programs

1. Talk to your friends and family. The people closest to you will often be the most enthusiastic about seeing you achieve your dream. For this reason, they should be the first ones you turn to when it comes time to start raising startup capital. Take the time to sit down with them to describe your vision for your business and explain what their money would be used for.^[1]
   
   • Your friends and family might not be able to match the donations of professional investors, but every dollar you accumulate will bring you one step closer to meeting your goal.
2. Weigh the pros and cons of borrowing from your personal connections. Appealing to the generosity of people you know isn't without its risks. On the one hand, you're less likely to be turned down. On the other hand, there's always a chance that you could lose their money if your endeavor is unsuccessful. Make sure you've looked at the situation from all angles before asking for or accepting any considerable sums.^[2]
   
   • Consider drafting up some paperwork to formalize your arrangement. Having a legally-binding document in place confirming a loved one's financial commitment, and your promise to make good on it, could give you both peace of mind.^[3]
3. Take advantage of crowdfunding. As the internet becomes further integrated into business, more and more entrepreneurs are turning to crowdfunding websites like Kickstarter, AngelList, and Wefunder to raise seed money. With crowdfunding, investors can choose to donate as much or as little as they want. This minimizes their overall risk, which is more likely to attract donors.^[4]
   
   • Include a detailed description of your product or business plan. This will essentially be an early written pitch designed to sell contributors on the potential of your idea.
4. Offer rewards to your crowdfunding contributors. The key to successful crowdfunding is not just to come up with a good pitch, but to offer your donors “perks” as a return on their investment. If someone makes an offering of $100, for instance, they might get early access to a beta version of the product, whereas someone who puts up $1,000 might be given official sponsor status or receive an exclusive invite to the business launch.^[5]
   
   • Be sure to outline an approximate timeframe for when your donors can expect to collect their rewards.^[6]
5. Apply for a government grant. For a shot at increasing your early startup capital in the U.S., apply for a grant through the federal government’s Small Business Innovation Research (SBIR) program. You'll be asked to prepare a detailed proposal outlining the particulars of your product or business model. If your proposal is selected, you have the potential to be awarded up to $100,000 in Phase I capital, and up to $750,000 with a Phase II commitment.^[7]
   
   • Visit Grants.gov to review a list of other federal grants and see if your venture qualifies.^[8]
   • Even if you don't end up with a contract, explaining and defending your plan can be great practice for delivering a more focused pitch to potential investors.

EditSeeking Investment Funds from Professionals

1. Network to get in touch with outside investors. Share your idea with business associates who have connections to prominent industry figures. It’s possible that they know someone who might consider investing in your idea if they think it seems promising. All it takes is one interested party to get the ball rolling.^[9]
   
   • Ask your friends and family to pass the word along, as well. The more ears you reach, the better your chances of securing a commitment.
2. Attend a business startup conference. These events give entrepreneurs a chance to meet with potential investors firsthand and talk about their ideas. Run a search for startup conferences taking place in your area to buy tickets or reserve a presenter spot. You’ll need a detailed presentation or functioning prototype of your product if you’re going to be presenting.^[10]
   
   • The biggest benefit of unveiling your concept at a startup conference is that it allows you to interact directly with the people who will be putting up the money.
3. Take out a loan. Head down to your bank and talk to a loan specialist about the terms for applying for a small business loan. You'll need to have a general idea of how much you'll need to kickstart operations, and be able to make a commitment to paying back the money on the bank's terms. Treat your loan application the way you would any other pitch—be professional, enthusiastic, and ready to sell the lender on the potential of your startup idea. ^[11]
   
   • If possible, look for institutions that are backed by the Small Business Administration. These lenders tend to be more forgiving when it comes to things like interest rates and repayment structures.^[12]
4. Work with a venture capital firm. These are companies that earn their profits by investing in promising new businesses. Pitching your idea or product to one of these companies could be a good way to net a good chunk of your startup funds with one transaction.^[13]
   
   • The investors in a venture capital firm will want to see that you’ve done your homework when it comes to things like your business model, customer demographic, and estimated profitability. If your startup doesn’t make money, they don’t make money.
   • Since venture capital firms tend to be willing to take chances on riskier investments, you’re more likely to get a commitment. One downside of this, however, is that they’ll usually set a higher interest rate to make the risk worth it.
5. Get the attention of an angel investor. Wealthy individuals who offer startup money in exchange for a share of the company are known as “angel investors.” These people typically don't have as much of an interest in ensuring a return as venture capitalists or other private investors, but instead make donations for philanthropic or other personal reasons.^[14]
   
   • Tracking down angel investors can be tough since they don't tend to advertise, but you might be able to improve your odds of finding one by reaching out to associates with retired connections who like to keep a hand in the business world.^[15]
   • Keep in mind that because angel investors are buying into your business, they may expect to have some say in how it’s run.

EditSelling Investors on Your Startup Idea

1. Create a mockup or prototype of your product. Before an investor can determine whether their money is being put to good use, they’re going to want to see what that use is. If the idea you’re pitching is a product, such as a household appliance or piece of computer hardware, work up a functional model. Having something to show your donors to make them feel more confident about their investment.^[16]
   
   • It shouldn’t cost too much to manufacture one or two basic units—in fact, you’ll probably be able to cover the cost of production with the donations you received from your personal acquaintances.
2. Test consumer reaction to your product. Round up a group of volunteers to act as a test market. Give them a sample of what you’re offering, then invite them to offer feedback about what they liked and what they didn’t. Their responses will give you a sense of what improvements you need to make to your product before you introduce it to the market.^[17]
   
   • In order to ensure that the opinions you’re getting are unbiased, it’s generally best to recruit people that you don’t know.
   • Consider paying your test subjects a small sum in exchange for their time. Chances are, you’ll hook more volunteers this way.
3. Show investors that you can make do with limited resources. Refine your product or business model as much as possible before you ever reach out for funding. The more developed it is going in, the better your investors will be able to envision it in its finished form.^[18]
   
   • As part of your pitch, emphasize how much of your plan you've been able to accomplish without outside assistance. In this way, your lack of investors at the outset can go from being a weakness to being a selling point.
   • Making the most of the resources you have at your disposal not only forces you to take a more organized approach, it also leaves less to guess at in terms of how your product will shape up.^[19]
4. Come up with an accurate projection of your expenses. Consider how much you’ll need to get your product ready for the market. That way, you’ll be able to bid for the minimum amount you need and avoid creating unrealistic expectations. Asking for too much money in the initial round of funding could discourage potential investors.^[20]
   
   • Being able to cite a specific number will help weed out investors who aren’t willing or able to offer the necessary funding.
   • At this stage, you’re mostly focusing on the cost of production or operation itself, so you can put aside considerations like leasing a property or hiring hourly employees for now.
5. Have a specific plan for your seed money. It’s not enough to say that you need $700,000 to bring your product to market. During your pitch, investors will be expecting to hear how you intend to put their contributions to use, as well as how they’ll eventually pay off. This will require you to break down your projected expenses into a structured analysis that shows how much each phase is expected to cost.^[21]
   
   • For example, hiring a team of 3 software engineers to design a new computer program over 8 months at $12,000 apiece per month would cost a minimum of around $300,000.
   • Demonstrating a thorough understanding of what your startup funds will be used for shows that you’re responsible, and therefore pose less of a risk to investors.

EditMaking the Most of Your Investor Donations

1. Devise a backup plan in case you fail to meet your original goal. Even with an innovative idea, a solid pitch, and a well-executed prototype, you may end up falling short. Prepare yourself for unexpected pitfalls by creating multiple plans based around different levels of funding. If one model doesn’t convince the investor, you’ll still have another less expensive option on standby to secure partial funding.^[22]
   
   • Downsizing your original plan could mean starting off with a smaller operations team or removing costly extra features from an early version of your product.
   • Proceeding with less seed money may cause your business to grow slower than expected, but it doesn’t mean that it’s dead in the water.
2. Keep your investors informed. Make it a point to offer regular updates on the status of your venture. The first few months of any startup are critical, and it’s important to make sure that you and your investors are on the same page. Since it’s their money that’s making the startup possible, they deserve to know how things are shaping up.^[23]
   
   • This could involve creating a monthly mailing list documenting your progress as you approach your launch date, or sending out a notice whenever you make a new hire to your development team.^[24]
   • Reports that your venture is going well could even serve to attract new investors who want a piece of the action.
3. Set yourself up for additional rounds of funding. There's no need to cut ties with your investors once you've gotten your startup off the ground. As your business gains momentum, you can begin appealing for support based on its potential for expansion. With each subsequent phase of funding, you'll be able to acquire more of the resources you need to pave the way for future success.^[25]
   
   • After the early seed round, your plan will move into "Series A" funding. Here, you'll use the funds you receive to refine your product or operations, develop key procedures, and market yourself to begin building a customer base.^[26]

EditTips

• Don’t underestimate the importance of having your own revenue stream. Setting aside a portion of your paycheck every month can help you reach your projected that much faster.
• Consider liquidating some of your assets, like property or a collection of rare baseball cards, to pad your funding.
• Contributions from your loved ones are essentially charitable donations. They’re a good start, but they usually won’t be enough to bring you anywhere near what you need to actually begin operating.^[27]
• Having less-than-stellar credit doesn't necessarily discount you from scoring a small business loan. However, it may mean contending with a higher interest rate or annual APR.

EditWarnings

• More investors isn’t always better. Don’t forget that each of your contributors will be expecting a return on their investment. Making money is the goal, but piling up more than you need won’t guarantee a successful venture—it will only increase the number of obligations you’ll have to fulfill.

EditSources and Citations

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