Seed funding refers to the money committed by investors in the earliest stages of a startup. The funding is equity-based and can come from family, friends, angel investors, or venture capitalists.
As one of the chanciest forms of investing, the investor relies on the information provided by the company wanting the seed money long before the business generates an income.
Some of the most known startup failures involving seed capital include the famous case of Theranos, the company that developed a blood test that could pick up a whole lot of diseases and is now also facing counts of fraud. Likewise, Jawbone, the manufacturer of wireless speakers, fitness trackers, and headsets, became one of the most expensive startup failures for its backers.
Common Seed Money Management Mistakes
Undoubtedly, an entrepreneur who has just secured seed funding for a business idea will want to celebrate immediately, and by all means, they should. However, that is only the beginning; from that moment onward, they need to have these goals in mind:
- Work at making the startup successful.
- Ensure the money lasts until the next round of funding.
- Plan the next round of funding to take the business further.
Early-stage funding for startups has become extremely difficult to find as more angel investors and venture capitalists prefer to fund at later stages. However, those that know how to pitch their startup correctly can grab the attention of investors. Furthermore, once obtaining the seed funding, the correct handling is imperative to the success that will lead to the next round of funding.
Langley Respess, a financial and wealth management adviser at UBS, recently told Hypepotamus that these are some of the usual mistakes made by entrepreneurs with their seed capital:
The newly acquired funds of a startup must last until it is ready to consider the next round of funding. Therefore, the most common mistake made by most new founders is to spend the money too quickly.
Moreover, there is also the danger of spending the money too conservatively. The company needs to hire and expand quickly to ensure the competition does not get a foothold in its customer base. Indeed, there have been cases where competitors with inferior products win the market because the startup did not make bold moves.
Spending the funding at the right pace ensures that an enterprise does not run out of funds before the next round, but caution is needed not to stunt growth.
Hiring Employees That Fit
The CEO of a business cannot do everything alone as they grow it. Therefore they need to hire talented individuals to help, but not too many. Bootstrapping doesn’t work here; they should hire people who can initially fit into several roles and then consider employing others later.
On the other hand, some companies go way over the top and hire a top manager at a considerable cost, believing that that person is smart enough to achieve the desired outcome. If things don’t work out, laying off that person is costly.
Initially, an unsustainable employee cost structure is a massive mistake, wasting the seed funding.
Product Viability and Sales
Seed funding aims to ensure a minimally viable product and increase the company’s revenue. Therefore, product development cannot take precedence over sales or vice versa. If needed, external sales resources can help with efforts to attract customers while the team works on perfecting a successful product. However, revenue remains essential in ensuring that the startup does not run out of cash, and along the way, developers can add features and improvements to the product.
Startups are risky, but their founders can counter the risks by maintaining their focus on the business at hand. Their task is to attract customers while ensuring they don’t run out of cash as they work toward growth and raise the subsequent funding round. Creating a base of loyal users generates the retention needed by the company to attract the next round of funding, so they need to concentrate on their growth momentum.
In the early stages, startup founders play a massive role in its development and growth. Securing seed funding from angel investors, venture capitalists, family, or friends takes a lot of effort. Then again, ensuring its wise allocation in product development and employee hiring is even more challenging.
Besides realistic goals and spending, the founder must ensure the business does not stagnate. They can do this by chasing revenues and must not fear hiring individuals who can give the startup its desired outcomes. The faster they do this, the better the survival chances of the startup, allowing it to plan its next phase of growth.