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6 minutes read

Understanding Seed Funding for Tech Startups

By Robert Kazmi
By Robert Kazmi
Other
6 minutes read

Seed funding for tech startups is critical to help them get off the ground and reach additional funding rounds. Most tech startups rely on custom mobile app development to power their innovations and drive business. However, app development costs money, and many tech startups cannot afford to cover these costs via bootstrapping. 

Early-stage startups that can successfully raise seed funding can begin developing their app idea and work to build additional investor interest. Unfortunately, tech startups are the most common type of startup, which means that there is more competition for venture capital. As a result, venture capitalists generally look for more than a good idea from early-stage startups in the tech sector. 

This post will explain what seed funding is, what it is used for, the advantages of a seed funding round, and how your tech startup can improve its odds of having a successful seed funding stage. 

What Is Seed Funding? 

Seed funding is the first round of funding a tech startup does, and it is often necessary to get critical components of the startup running. Typically, this includes the hiring of talent, the purchase of machinery or tools, etc. Raising seed funding is essential for startups to gain traction and reach additional funding rounds, especially Series A. 

Seed funding differs from other funding rounds because it is the most lucrative for angel investors and venture capitalists. Investors involved in the seed funding round get more equity per dollar invested than in any other funding round. However, investing during the seed funding round presents the most risk since there is a high probability that the startup will fail and their investment will be lost. 

As a result, many venture capitalists tend to shy away from seed funding in favor of investing in later funding rounds. Of course, there are exceptions, but tech startups should focus on angel investors as they are more likely to invest in the earliest stages. 

What Is Seed Funding Used For? 

Securing investment is only part of the equation for generating additional investor interest in later funding rounds. Understanding how to best utilize seed funding to deliver results is vital to the successful start of your business and your ability to convince investors to invest more. Generally, tech startups use seed funding for:

  • Product development and research
  • Market research 
  • Developing proof of concept 
  • Hiring skilled employees
  • Building internal infrastructure

Product and market research is critical to the success of any startup. Before committing development resources in one particular direction or another, it is essential to thoroughly research your target market and app idea to ensure an ideal product-market fit and maximize the desirability of your idea. 

For example, if your startup wants to develop an innovative IoT solution, you need to ensure that your product will be helpful and adopted by consumers. Seed funding can give your startup the time to validate ideas before development. 

In addition, seed funding helps founders create a winning culture by allowing them to hire proven experts like project managers, build an internal infrastructure, and develop their ideas freely. Finally, with seed funding, your tech startup can be sure that the idea it is developing has consumer demand and delivers user value. 

The Advantages of Seed Funding 

The primary advantage of seed funding for investors is greater equity, but what are the advantages of seed funding for tech startups? The seed funding round offers startups several advantages, including:

  • Proof of money management 
  • Ability to get their idea to market faster 
  • Non-monetary investor value (such as guidance)

Series A funding is generally the most influential funding round for tech startups. A seed funding round improves a startup’s chances of securing Series A funding. In addition, successful seed funding demonstrates to investors that a tech startup can generate and manage funds in a way that delivers results. 

In addition to helping startups generate additional investment, seed funding can help your startup get its product to market faster. Being the first startup to market can yield greater results as untapped markets can help propel your startup to unimaginable heights. Securing seed funding gives founders the opportunity to focus more on strategy and development and less on fundraising. 

Finally, seed funding can help tech startups partner with investors that can offer additional guidance and resources, such as access to market insights, access to additional venture capitalists, and other entrepreneurial resources. These insights and experience can be invaluable in any industry but especially the MedTech, FinTech, and EdTech industries. 

How Can Tech Startups Improve Their Odds of Getting Seed Funding? 

Securing seed funding can be difficult for tech startups since there are so many startups in the tech sector looking for investment. However, if you understand what investors are looking for, raising seed funding can be accomplished. There are two things that you need to keep in mind when working with investors. When raising seed funding, you must minimize investor risk while simultaneously expressing the future potential and revenue of your business venture

When you combine these two things, your project confidence to investors, which makes it easier for them to decide to invest in your tech startup. The most effective ways to minimize an investor’s perceived risk are to demonstrate a product-market fit, hire a team of experts, offer a detailed pitch deck, and address investor expectations and your plan for meeting them. 

If your tech startup can successfully minimize perceived risk while demonstrating potential, it won’t have issues raising seed funding. Remember, there are many different startups all vying for the same investor interest. Demonstrate your unique value proposition. For example, if you think you have an eCommerce idea that will revolutionize the retail industry, be sure that you are showcasing this innovation to investors. 

Final Thoughts 

Starting a tech startup is not an easy task. A big part of launching a tech startup is fundraising. Don’t shy away from investors. You will need their support to launch your product unless you plan to bootstrap. If you want to learn more about seed funding for tech startups, reach out to an experienced app development partner to help guide you through the challenges associated with creating a tech startup.

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