How to raise seed capital for your startup

Startups are often filled with ambitious ideas, growth-hungry team members, and excellent positioning. But most share one common problem: they lack funding. In fact, nearly 30 percent of startups fail due to inadequate funding. This problem isn’t isolated to startups. Eighty-two percent of business closures are directly tied to cash flow struggles. Luckily, there are a wide variety of resources startups can leverage to get funding during the early stages.

One way to get started is to raise seed funding.

Understanding seed funding

Startups looking for funding rarely have positive net cash flow, and many only have a few founders and a great plan. Only 2 in 5 startups are profitable at any point. And most startups struggle to find profits early. According to some sources, it takes around 2 to 3 years for the average startup to start generating profits. Many founders do not have the personal wealth to bootstrap their startups for years.

Because traditional funding levers (e.g., private equity firms, investment banks, hedge funds, etc.) aren’t willing to fund unproven businesses, startups often look for a special type of funding called “seed” funding. As the name suggests, investors provide a seed (funding) in the hopes that the startup nurtures that seed money into a healthy tree (a successful startup). In return, the startup provides equity (usually between 5 to 20 percent) or convertible debt.

So, where do you find seed funding?

The “who’s who” of seed funding

Generally, seed funding comes from one of the following sources:

• Friends & family: The most common method of seed funding is family and friends. Many startup founders have friends or family members who also own businesses or invest. Also, many startups have former founders on the team, who may have friends or colleagues looking for seed opportunities. However, not all founders are well-connected. Luckily, there are multiple other avenues for these founders to secure funding.
• Angels: Some investors prefer to work with startups. These people (who usually have a high personal net worth) are called “angels.” Many angels advertise themselves, but there are also a few websites that help connect people directly with angels (see the resource section below).
• Incubators: Founders with an idea (but without an actionable product or service) can join an incubator. These are essentially mentorship programs that provide a workspace, funding, networking, training, and resources to help startups succeed. You can expect to give away a percentage of your company to join an incubator. This is one of the best options for high-growth startups that need more than just funds.
• Accelerators: Unlike incubators (which focus on end-to-end growth), accelerators support growth-driven startups with financing, mentorship, and product development in a short burst. Most accelerators attempt to pack many years’ worth of business experience into a few months. Generally, you give away some equity and join multiple businesses all accelerating at the same time.
• Venture capital: Traditional funding gateways like private equity firms prefer lower-risk investments. Venture capital firms thrive on high-risk, high-reward funding. And they almost solely fund startups. However, many startups save venture capital for later seed rounds. Incubators, angels, and accelerators provide unique benefits (i.e., networking, business support, education, etc.) that venture capital firms do not provide. However, startups with experienced founders often leverage venture capital as a hands-off way to raise initial funding.

Each of these funding levers provides unique benefits. Friends and family are often the easiest way to get quick funding. But at the risk of damaged relationships. Angels, incubators, and accelerators all provide a wealth of intangible benefits, but they can be challenging to get into, depending on the startup’s business plan. And venture capital usually works best when your startup already has a well-established framework.

Resources to help you raise capital for your startup

Understanding who provides seed funding isn’t the same as actually getting seed funding. Many startups exist outside of massive cities, and not all founders are well-connected. Thankfully, a significant amount of funding is now done digitally. There are many websites and services aimed at providing startups with the resources and experience they need to grow a successful company. These include:

Angel-finding websites: There are a wide variety of angel funding websites that directly connect founders with angels across the globe. Some of the most popular include:

• Angellist
• Angel Investment Network
• Angel Forum
• Gust

Incubators: There are thousands of incubators across the United States alone, but some stand out more than others. The most successful incubators include:

• TechStars
• Y Combinator
• Mass Challenge
• SOSV
• Alchemist Accelerator

Crowdfunding websites: Crowdfunding is a great way to quickly raise funds for your business. You essentially get funded by many different anonymous people in return for equity. While GoFundMe and Kickstarter are great for product-based startups, most new startups go through seed-based crowdfunding rounds on websites like:

• SeedInvest
• StartEngine
• Seedrs
• MicroVentures

Loans: You always have the option to take out loans and microloans. Small businesses can use SBA loans to get some quick capital, and there are a wide variety of unique loan options for startups. For example, solutions like Pipe give you up-front capital in return for recurring revenue (which may be ideal for some SaaS companies looking for hands-off funding). You can find loan options at your bank or through a variety of different websites.

In addition to these funding options, there are many resources for startups that aren’t related to capital. Startup events, networking websites, forums, social media, and a wide variety of websites exist to help founders connect to other founders and business leaders. Growing a successful business takes more than money. You should always look to build connections and gain insights from industry leaders along the way.

Partner with us

Visit The Wave, our resource hub for startups, to learn more about pre-seed funding and other stages of startup funding (Series A, Series B, Series C). DigitalOcean also provides founders a variety of resources through Hatch, our global startup program. Sign up to learn how we can help you build and grow your startup through intelligent infrastructure solutions.