What is a seed round of fundraising typically used for?

Seed Round of fundraising: This is one of the most important rounds for an early-stage startup. In essence, this round defines whether an idea kicks off the ground at all. So many great ideas fail because they don’t get the traction or funds to test their business plan. As an early-stage entrepreneur, the focus is all around the idea, its validation and identifying whether it has a chance of success.

In this article, we will answer the question – what is a seed round of fundraising typically used for? Depending on the stage of your idea, either your product development or first sale are the pivotal touch-points.

What is a seed round of fundraising typically used for?

Depending on the stage of your idea, you can use the seed round of funds for all or any of the below purposes. The main reason for seed funds is to enable you to develop the idea and get your first customer. Typically, an investor will be interested to see how a product performs in the market, identify and qualify the market appetite etc. Ideally, the seed stage acts as a foundation for you to raise subsequent funds and reach your product market fit and be ready for Series A fundraising.

Product Development in seed round of fundraising

In a pre-seed stage, we normally develop a prototype or MVP. This is then used to qualify the market interest, have a few customer calls and identify whether they are interested. This stage is very important to ensure that you get the right customer information. In this stage, we ensure that we understand the main pain points of the customer. Once you have an idea of this, you can come back to the development team to start devising an actual solution.

This is where you’ll use your seed funds to develop the first version of your product. This version will then be sold to the early adopters in the market. The best case scenario in a seed stage is to gain some early customers who are willing to buy your product. If you can’t get a sell, the second best thing is to get some beta customers with a promise of purchase at a defined later stage.

Marketing and Sales

No investor likes a product that doesn’t give a return on investment. In essence, it is all about the sales and reaching the right customer base. Early sales are crucial for a startup – they define whether the startup lives or dies. You can go for subsequent fundraises, but future rounds are difficult if you don’t have early customers. Hence, it is wise to save some of your seed fund for your marketing and sales activities. Try to get your early customers, their feedback so that you can define the future product roadmap.

These early customers signify traction for investors who will be interested in subsequent rounds with you. Also, if you don’t have early customers, you run the risk of diluting heavily in further stages of your product development

Company Operations, Administration and Legal

These are the basic nuts and bolts of your company. This part of the seed fund can be used to setup the company, types of shares – SEIS types of funds etc. Typically you can use it for lawyer and accounting fees, getting the patents, and do the paperwork for funding. It is very valuable to have legal counsel at these early stages because they can set you up for future success. They will be able to define the structure that can help future fund raising rounds. Although this may sound like paperwork exercise, your Series A and other fundraising steps will rely heavily on how well you are setup. So make sure that you have an allocation for that.

These are the main areas where a seed fund is typically used for. However, you can have some allied use cases too. But make sure that this stage is all about the idea – proving a possibility of success. Using this as a proof, you can grow further and expand your company to its true potential.