Entrepreneurship Industry News

How Startups Can Choose The Right Seed Investor

  • When a business is in the startup phase, entrepreneurs tend to say yes to anyone who offers funds they need
  • While finding seed investors for a startup, founders cannot have any doubts on the capital needs
  • Besides investors, startups and founders can resort to bootstrapping or ask friends/family to invest money

It is a well-known fact that the timing and manner of raising seed funding are highly important for a startup. However, many don’t realize the significance of choosing the right investor for raising funds, which creates a problem at a later stage. But, before we delve deeper into the ‘right’ and ‘wrong’, let’s first discuss who exactly seed investors are and why exactly they are important.

Importance Of Seed Investors

In the initial phases, startups and founders can resort to bootstrapping or ask friends/family to invest money. However, there comes a point when every startup has to explore external avenues for arranging funds in order to grow and survive in the competitive world. This is when seed-stage investors come into the picture! The investors offer adequate capital, which helps the startup take off from the ground. Besides, they also contribute their skills and knowledge for the successful growth of the business.

Since investors’ money is at stake and they are quite profit-oriented, they make sure that the capital is invested in an appropriate manner. Another significant benefit of having an investor on board is that seed investors have a goal of reaping long-term benefits, and thus, they make efforts to build the company’s goodwill in the market. This attracts more and more investors to fund the business, increasing the overall capital inflow. They are also experts in their fields, which is why they have proper knowledge of maximizing profits and minimizing risks. So, all these factors boil down to the fact that seed investors play an essential role in the growth of a startup.

Tips For Finding The Right Investor

Let’s proceed to the next aspect, which is how to find that ‘right’ investor. When a business is in the startup phase, entrepreneurs tend to say yes to anyone who offers funds they need. This step can prove to be a big mistake because not every investor is the right fit for their startup. It is natural to get apprehensive about getting adequate funds, but falling in the hands of a wrong seed money investor might result in the rapid downfall of the business. This is why choosing the right investor is of utmost importance.

Mentioned below are some tips that will help first-time founders and startups find the appropriate seed capital investors.

  1. The Business Type:
    The first step before choosing an investor is understanding the business model or type of business that the startup wants to undertake. Many seed fund investors in India and across the globe have specialisations in particular industries, which is why they can offer expert advice in the corresponding segments. Hence, approaching the investors whose interests match the business proposition is important. This way, apart from the capital, investors will also be able to offer guidance and support.
  2. Trustworthiness:
    It is important to have those investors by the side of the startup founder and get them to trust and believe in the idea. It is a well-known fact that during the initial stages, a business goes through many ups and downs; hence, finding seed capital investors who won’t leave the startup by the wayside during tough times is of utmost importance.
  3. Problem-solving:
    When a business is in the nascent stage, apart from adequate funding, it also requires proper feedback and advice from someone who is experienced in the field. While many seed-stage investors in India might be willing to invest in startups, only some will be able to offer priceless advice for solving current problems. Startups and founders need to find those investors who are experienced and have a strong network, as this will prove valuable in the long run.
  4. Capital Needs:
    During the process of finding seed investors for a startup, founders cannot have any doubts about the capital requirements. Different investors can bring varying amounts of funds to the table, which is why it is important to consider the business requisites. For instance, angel investors can typically invest a lesser amount as compared to angel groups or venture capital firms.
  5. Ability To Fund:
    Finally, in the Indian context, it is important to know whether an investor has adequate funds to invest in the idea or not. Recent taxation changes have put a lot of pressure on angel investors from this point of view. If the financial health of the investor is not good, they will be under tremendous pressure, which in turn will flow down to the startups they invest in as well. It is best to choose an investor that is capable of conducting different rounds of funding.

Mistakes To Avoid While Choosing Seed Investors

Any investment is crucial for a startup, but seed investors set the tone for the rest of the business life cycle. However, while vetting potential investors, startups and founders need to avoid overvaluation or undervaluation of the business. Before looking and researching the investor ecosystem, it is best to calculate the amount that will be sufficient for facilitating a smooth runway of the business. Another thing to remember is not to rush while selecting seed investors. It is best to be patient and select those who have adequate funding and are willing to assist in the future rounds of fundraising. Start with a low target and increase the same if and when possible.

There is no doubt about the fact that seed investors are important for every startup. With the presence of a host of seed investors in India these days, it is becoming all the more difficult to choose the right one. This is why founders and startups need to carry out thorough research and consider all the above pointers before approaching anyone with a concrete plan and business pitch. Always remember that a good relationship with investors can significantly improve the growth and success of a startup.

Read More: Inc42