As an entrepreneur, you may have an idea or are in the process of brewing one. To succeed, a plan to procure funding is necessary right from the stage of inception. It is the dream of every entrepreneur to secure 'seed funding.'
Many months of strategizing are invested to develop pitch decks and attract seed money.
It's one of the key steps before your idea can take flight and achieve set milestones.
There are the initial exciting times when the entrepreneur teams up with a few like-minded people to design a logo and develop a website that elaborates on the idea. Investment is an important element to bring the idea into its physical reality.
Below, we list 10 sources of seed money — note that the first five require a company in existence with evidence of actual sales.
1. Angel investors
The first source of seed funding that often comes to mind is angel investors. Individuals with surplus money and those who are willing to invest in promising startups are called angel investors. One key advantage of working with angel investors is that in addition to providing money, they also mentor you for a sustainable future and steer your venture in the right direction.
Top-tier companies like Google, Alibaba and Yahoo all raised funds through angel investment.
This form of investment typically occurs in the initial stage of a startup's growth, with investors generally demanding up to 30% equity. If your company fails, they lose their investment. Or if you have future investment rounds, their investments are subject to dilution.
Angel investments have their own disadvantages: in comparison with venture capitalists, angel investors provide less money.
The disadvantage is that their investment is less compared to venture capitalists, but expect high returns on their investments because financing a startup is risky.
Some angel investors appeared on India's Shark Tank and are today much talked about. To name a few active ones in India:
- Ratan Tata
- Anupam Mittal
- Anjali Bansal
- Kunal Shah
- V. Mohandas Pai
Average Ticket Size – INR 3-20 Lakhs.
Here is a list of top 45 angel investors in India. There are many online resources available to help connect you with an angel investor, such as the Angel Capital Association. You can find individual angels or angel groups. Just remember to be prepared with a business plan when asking for their financial support.
Tip: To approach them, prepare a pitch deck and a product prototype, contact the angel investor, seek an appointment and make an impressive presentation.
2. Angel networks and platforms
This is a pool of angel investors who can invest larger amounts of seed money and hedge risks. In exchange, the investor seeks equity ownership in the startup.
Popular Indian Angel Platforms – AngelList Venture, LetsVenture, Venture Catalysts, Indian Angel Network, Mumbai Angels, Chennai Angels, Hyderabad Angels, Calcutta Angels, Chandigarh Angels etc.
Average Ticket Size – USD 100-500k. Each firm allocates funds within a specific range.
3. Micro venture capitalists
These investors fund even lesser amounts and take an equity stake in return. Many micro VCs have shown an interest to partner with promising early stage founders as well. Pre-seed funding aspirants might find it useful to tap them.
Popular Indian Micro VCs – iSeed Ventures, Fluid Ventures, 100X.VC, Pentathlon Ventures
Average Ticket Size – $60-70 mn
4. Venture capitalists
Here come the top-tier investors who fund startups that possess the highest growth potential. VCs mostly invest in a startup in exchange for equity when there's an initial public offering (IPO). They also provide entrepreneurs with:
- Mentorship
- Connections
- Evaluation of the startup’s sustainability and scalability
These firms are specifically set up to provide seed money to promising start-ups. Series A seed funding is typically where the VCs enter and take their pick.
VC funding is often sizeable and meant for the growth and expansion of the start-up firm.
The emphasis here is on steady growth and sustainable development. In return VCs seek equity or equity-linked instruments. The VC opts out when the company releases an IPO or otherwise gets acquired.
However, venture capital investment is reserved for startups that have crossed the initial phase and are generating enough revenue. Also, just like angel investors, VCs have their own shortcomings.
Generally, venture capital investment comes with a short-term plan like three to five years. So, if your product needs more time to build a market for itself, VCs might not invest in your startup.
Related: What is a startup incubator?
Venture capital or angel investment?
Unsure of the difference between venture capitalists and angel investors? Here are the major differences between them:
- Angel investors just invest in early-stage startups; VCs prefer developed companies.
- Angel investors are individuals, whereas venture capitalists are part of a company.
- Venture capitalists invest considerably more than angel investors.
- Angel investors primarily provide financial support and sometimes even advice. VCs provide every possible help to grow a company.
Popular Indian VCs – Sequoia India, Blume Ventures, Eight Roads, Tiger Global Management, Lightspeed India Partners, IvyCap Ventures, Nexus Venture Partners, Westbridge Capital, India Quotient, Lightbox, Omnivore.
Here is a list of 47 most active venture capital firms in India.
Average Ticket Size – Approximately $400k-600k mn
How to get venture capital financing for your startup?
1. Submit your business plan
This is the initial step of approaching a venture capital financing firm. The plan needs to be detailed and should cover the following points:
- Executive summary of the proposal
- The consumer problem you are trying to solve and its market size
- Analysis of the competition
- Financial projections, with realistic assumptions
- Details of the founding team, along with their credentials
Post submission of the business plan, VCs can ask questions or clarifications on your product and business. Be prepared to answer them with supporting data points.
Since VCs keep busy with several business proposals, keep following up (at regular intervals and gently) for feedback.
Related: How to write a business plan?
2. Introductory meeting
Photo: Product School on Unsplash
Setting up a meeting with the core team can take a long time so be patient. In this meeting, you’ll present your proposal to the VC firm and answer any doubts or queries of the investors.
Post this meeting, the firm decides whether to invite you for the next stage of the process or not.
3. VC firm researches the proposal
Once the venture capital financing group determines that your startup fits within the investment methodology of the fund, they follow up with business and legal processes. This is where their experts dig deeper into your business plan and its potential.
An analyst from the VC firm evaluates the risk and return from their point of view. If the analyst decides the business idea is promising, the deal is transferred to the VC firm’s legal team to verify the documents on the business.
Related: 6 sources of business finance in India
4. Term sheets and funding
If the VC is satisfied with what they’ve learned, they then proceed with sharing the financing term sheet with you.
A term sheet basically contains the commercial and legal conditions of the funding. You will then meet with the investors to negotiate on terms like:
- Valuation
- Exit clauses
- The number of board members and their rights
After accepting the terms, legal experts document the deal and the funds are transferred to your business.
How to increase your chances of getting VC funding in India?
Getting venture capital funding is quite competitive — less than 1% of startups succeed in achieving this.
However, you can increase your chances of being noticed by a venture capital financing firm and eventually getting the most coveted financial support from them.
Below are some key points the VCs consider before investing in a company. You can work on these points, turn them into your strengths and enhance the chances of gaining their trust.
- Constitution of the company (private limited company is preferred by VCs)
- What is the market size of the problem that the company is trying to solve?
- What is the level of threat from competitors?
- Has the business already proven a demand for the product or service?
- Can the idea/product be replicated on a large scale?
- The credibility and experience of the founding team
Across the globe, VCs mostly invest in companies that are working with the latest technologies and offer huge potential for growth. In India, startups that are favoured by VCs operate in these fields:
- Artificial intelligence (AI)
- Financial tech
- Education tech
- Big data
- Health
- Cybersecurity
- Internet of things (IoT)
Here is a comprehensive list of all the major investments in Indian startups since 2015. You can get a better idea about the latest trend of funding by analysing this list.
5. Corporate venture capital
CVCs comprise large multinationals investing their corporate funds into various small, innovative start-up firms. Association with big names is a definite advantage for the start-up that is looking to market itself.
The CVC also lends its expertise in various areas including:
- Marketing
- Future vision and direction
- Developing success strategies
- Even a line of credit
In exchange CVCs claim equity stake in the company.
Popular Indian CVCs – Mahindra Partners, Dream Capital, Samsung Venture Investment, Unilever Ventures, TVS Capital Funds (P) Ltd, Intel Capital.
Average Ticket Size – Unicorns such as PharmEasy, Moglix, Grofers entered the valuation league of $1 billion in 2021 according to an article in VCCircle.
Related: 15 Indian business unicorns to learn from
6. Accelerators and incubators
All the above forms of funding require a company in existence with set criteria, including actual sales.
However, accelerators and incubators are typically six to eight-month programs that nurture start-ups with MVPs (Minimum Viable Products).
They are not only provided funding but also a networking platform to connect with investors, mentors and other startups. In return the accelerator/incubator takes equity stakes in the company. These are run by individuals or large corporations and big tech firms.
Most incubators are directly or indirectly supported by the government to in turn support the entrepreneur.
Popular Indian Accelerators and Incubators – GSF Accelerator, Microsoft Accelerator, JioNext, Prime Venture Partners, iCreate, Villgro, Amity Innovation Incubator.
Average Ticket Size – 45 lakhs to 1-1.5 crore.
7. Family offices
Another source of seed funding can sometimes be found closer to home.
India is a family-oriented nation with businesses passed down families through generations. Indian startups have the advantage of expertise from family-run businesses that have a wealth of knowledge and experience to help the budding entrepreneur.
While family businesses are known for their conservative approaches, the next gen is keen to break stereotypes and invest in new ventures. This doesn’t mean they reject the accumulated wisdom of their families, but rather seek to combine age old business practices with new strategies.
Family businesses are known to be more patient with a new company than angel investors, which might come as a relief to a start-up.
India has about 140 family offices heavily invested in the start-up space.
Popular Family Businesses – Azim Premji of Wipro, Anirudh Damani of K.Damani & Damani Group, Burman Family Office (investor in Dabur India), Bajaj Auto, DLF India, Havells, and Haldirams.
Average Ticket Size – Indian Family Businesses are creating a significant mark in the entrepreneurial space. They are expected to contribute 30% of the estimated $100 bn to be raised by Indian start-ups in 2025.
8. Government grants and funds
The year 2016 opened additional avenues for entrepreneurs to explore besides angel investors and VCs.
This program comes with a slew of benefits such as:
- An 80% rebate on patent costs
- Income tax exemption for the first three years for registrants
Loans are disbursed via the Small Industries Development Bank of India (SIDBI) Fund of Funds Scheme, which in turn invests in venture capital and alternative investment funds (AIF), which invest in start-ups.
Early stage start-ups can also avail Start-up India Seed Fund scheme.
Average Ticket Size – Overall the government of India has allocated INR 1000 cr for Fund of Funds for start-ups and INR 283.5 cr for Start-up India Seed Fund Scheme (SISFS) in 2022.
9. Venture Debt Funds
This is a hybrid scheme offered by non-banking financial corporations (NBFCs) called venture debt funds that provide debt finance to VC-backed startups.
Bank loans or equity are not a viable funding option when a startup is planning on expansion and requires working capital, as equity is an expensive source of funding for startups. In return, the venture debt funds take non-convertible debentures (NCDs) and equity warrants.
Popular Indian Debt Funds – Trifecta Capital, Stride Ventures, BlackSoil Group, Alteria Capital, and Nothern Arc.
Average Ticket Size – Overall figures - According to a 2022 Stride Ventures reports debt funds have raised about $538 mn, a jump amounting to nearly double the previous year.
10. Banks
Other seed funding options for Indian start-ups include conventional loans through banks.
They offer different types of loans for various business requirements such as:
- Working capital loans
- Equipment loans
- Start-up business loans
There are loans corresponding to each stage in the business.
MSME loans are also popular for medium and small to medium businesses. There are also several schemes and exemptions that MSMEs can avail.
Popular Indian Banks – Fullerton India, Omozing and NBFCs (Non-Banking Financial Company) offering loans to start-ups.
Average Ticket Size – The MSME average ticket size is INR 20 -45 lakhs.
Now that we’ve listed 10 sources of seed funding, let’s take a look at the typical funding sequence for a start-up.
11. Crowd funding
Another way to fund your business in India is through crowdfunding. In a nutshell, this is a way of collecting funds from a number of investors rather than just one.
This allows many people to contribute small amounts of money through an online portal and receive something in return.
For example, say I want to open an online business that needs $7,000 in starting capital. I can post my business proposal on a crowdfunding website and wait for a response. And to make my post more attractive, I can offer a short presentation about my business idea and how investors can earn money if it succeeds. If people are interested, they can contribute any amount of money they wish until I get a total of $7,000. Investor A may contribute $100 while investor B contributes $400 and so on until I reach my goal.
There are three types of crowdfunding:
- Reward crowdfunding. In this category, the investors receive a product sample or gift in return for the investment made.
- Debt crowdfunding. As the name suggests, you get a loan from investors that you are required to return under a given deadline.
- Equity crowdfunding. Here you need to hand over some portion of your business to the investors for the investment made by them.
There are many crowdfunding websites, so do your research on which ones are best for your business. Here are a few crowdfunding platforms to look at:
- Kickstarter
- Indiegogo
- Crowdfunder
- Patreon
- GoFundMe
Crowdfunding has gained a lot of popularity in the past few years and the process involved is simple. You need to put forth your startup details, business description and vision in front of potential investors using a crowdfunding platform. The crowd will tell you if your idea is worthy of support.
Pre-seed funding - a safe bet!
The very first step in financing — pre-seed funding — involves almost no paperwork and is unofficial. Its most definitely a safe bet, with no serious consequences attached and here's why:
In this stage, the founders may invest their personal savings, also known as bootstrapping.
Alternately, they could borrow from friends, family or supporters who are happy to see them succeed. They may not aspire for a share in your company, but simply expect you return their money at a mutually agreed time.
In pre-seed funding, the entrepreneur is armed with nothing much except:
- A unique business idea
- A consumer problem their idea will solve
- Some initial data to showcase the business’s prospects and applicability with the help of a business model
- Future predictions of growth
There could also be a few sales and customer feedback to validate the power of the business idea.
A few key employees or the founders themselves begin working with a prototype to give the idea an existence. The founders may include a high net worth individual as a partner.
On a rare occurrence, angel investors invest at the pre-seed funding stage. They provide financial backing, knowledge and expertise to help you grow. They may be individuals or a network of individuals with family connections and/or are experienced entrepreneurs who can advise a new business to make the right moves.
No wonder they are termed angels, who help avoid pitfalls and genuinely root for your success.
However angel investors and VCs usually enter the picture only when there is a good product-market fit and a revenue model in place.
Some other forms of pre-seed money include pitch competitions, start-up incubators, and government and business grants for early-stage start-ups.
Seed funding - wheels in motion!
For start-ups to grow into successful businesses, a corpus fund is required to implement ideas.
Because banks usually require security on loans (such as property), this is often not a viable option. This forces the entrepreneur to raise capital from investors or venture capitalists.
The initial amount raised through such endeavors is referred to as 'seed funding.'
It is the first official funding stage to invest in:
- Market research
- Pay salaries
- Start production
- Market creation/penetration
- Brand creation
- Team growth
This round will find angel investors and venture capital firms vying for equity stake in promising companies.
Corporate seed funds may also be tapped to raise money from large firms in exchange for equity stakes. Accelerators are companies that assist in high growth for a fee or equity exchange.
How to ace this stage?
Focus on accumulated market data. The job of the venture founders and managerial staff is to:
- Figure out how the product or service appeals to the target audience
- Smoothen out technical glitches
- Ensure problem-solution fit
- Attract good sales
Tip: Most entrepreneurs fail to convince investors of long-term growth prospects. Focus on how and in what direction you choose to take the company in a five, 10, 15-year projection. How do you plan to expand?
The stairway to success - Series A, B, C.
The subsequent stages of seed funding are Series A, B and C, which must be passed through in order:
- Series A: This is the second stage of funding where hopeful applicants have a working product or service. This phase is flooded by angel investors and venture capitalists. The aim is to create a substantial user base and establish a strong success track record that helps position the company for a larger scale of growth.
- Series B: This stage of seed funding supports increasing production and meeting market demands. Series B involves attracting a key investor who can in turn attract better investments. Though similar to the previous stage, here risk investors specializing in later-stage investment are included as potential partners, along with the ones in Stage A. It is easy to assume that revenue generated is good enough, not requiring further investment. However if your aim is market dominance, series B is an important step. Cash outflow for further expansion and market penetration may be a staggering unanticipated figure. It is important to take the first plunge, ahead of competitors and thereby capture the market. Capital plays a huge role in it. Tip: Focus on ways of market expansion, exploring new segments and untapped customer bases. Radical expansion via acquiring companies is a way to thwart competition.
- Series C: The fourth stage is meant for successful start-ups poised for very large-scale expansion. For example, launching a product at an international level. It could involve several other major acquisitions. Very few start-ups climb to such heights. The parameters for entry into series A, B and C and the capital they can raise can vary. What remains constant is the steady increase in the size of capital with the completion of each round.
Start-up funding in India
The Indian start-up ecosystem is bustling with activity. After the IT boom, where India emerged as a top player, enterpreneurship has captured the interest and imagination of young India.
New graduates, post-graduates or even the simple, uneducated (but supremely talented) Indians risk everything to contribute to a better India with novel solutions, inventions and services.
The year 2021 saw 42 unicorns in India.
As of July 2022, India is home to 105 unicorns with a total valuation of nearly $340 billion.
In conclusion, India is now the third-largest start-up hub in the world. The government, large corporations and even smaller companies are participating in building robust businesses that can contribute to a strong economy, creating a more conscious, integrated world.
Editor’s note: If you have yet to get a business website, put your business online in less than 10 minutes with Online Starter Bundle.
UPDATE: This seed funding for startups in India post was first published on 2 September 2022 and updated on 9 Jan 2024. It also contains content written by Charu Mitra Dubey, Saumya Dwivedi, and Kristian Rivera.
