At this stage, the business is a startup with an unproven model. While you can always try to finance the business through a bank loan, most financial institutions won’t extend financing to an early-stage business because it lacks a track record.
Instead of bank financing, many early-stage startups source seed money from:
- Bootstrapping — This happens when you source funds either personally or from your friends and family. Since most entrepreneurs don’t want to put their own finances on the chopping block, bootstrapping funds usually come from your network. Keep in mind that it’s very risky to accept seed money from friends and family. If the business doesn’t do well, it could put a strain on your personal relationships. While it can be easier to get a “yes,” you have to enforce boundaries. Treat your friends and family as the investors they are so you can succeed together.
- Debt — Seed money debt usually comes from angel investors, not a bank. In this scenario, an investor extends a loan to you in exchange for seed money. You’ll need to pay back the loan with interest, but this does mean you don’t give up equity in your company. If you anticipate meteoric growth over time, this could put more money in your pocket.
- Equity — Equity deals are a common way to raise seed money. You ask an investor for seed money in exchange for stock or a share of ownership in your company. This is great if you don’t want the burden of paying off debt right now, but it will make it difficult to control your company when you give away more equity.
- Crowdfunding — Platforms like Indiegogo and GoFundMe allow you to crowdsource products without giving away equity. You can offer steep discounts to your crowdfunding partners in exchange for their early purchase supporting your startup.
- Convertible securities — The most common type of convertible security is convertible debt. This deal usually starts out as a loan but converts to equity. If you’re trying to appeal to a risk-averse investor, you might use a convertible security agreement to secure seed money.
- Angel investors — High-income investors usually fund startups as “angels.” They typically finance seed money as a loan if the amount is under $1M and do equity deals if it’s above that threshold.
- Incubators: You can join an incubator program to solidify your startup ideas, design a product, and clarify your vision. Y Combinator is a well-known example, but there are incubators available across the globe.
Remember, the purpose of seed funding is to get your business off the ground. After you acquire seed money, you’ll create a track record that allows you to apply for venture capital dollars and, eventually, an IPO.
