Most Startup entrepreneurs do not have enough capital to launch their companies and need to raise money at some point to be able to grow to their full potential.
This process of raising funds in its initial stages is called ‘Seed Capital’ or ‘Seed Investing. It is used to cover the company’s initial expenses until the company can attract the attention of venture capitalists.
The fund raised in this startup stage is also the first official money that a business grows. The funds raised through seed funding are usually smaller when compared to funds that are raised in future stages.
Seed Funding in India
“Startup India Seed Fund Scheme” was introduced by the Central Government to provide financial assistance to startup companies. This scheme started in 2021 and will be applicable till 2025 across India.
The scheme focuses on building an ecosystem that functions on the idea of ‘of the youth, by the youth, for the youth’. This scheme supports startups across all sectors. In this scheme, around 945 crores have been distributed through selected “Incubators” on behalf of the government.
Seed investors in India invest in rounds of less than $500,000 and always less than $1,000,000. The amounts they invest range typically from $25,000 to $500,000. They evaluate the applications, and the successful one gets the funds. The government provides guarantees to help startup companies raise debt capital.
Eligibility Criteria for Seed Funding
- Startup companies in India need to be recognized by DPIIT (The Department for Promotion of Industry and Internal Trade), which is possible when the entrepreneur comes up with an innovative and high-growth potential business model or an idea that can create wealth on a large scale. Also, the startup should not be more than two years old.
- The startup must have a product or a service with viable commercialization, market fit, and one that can make it grow big.
- Startups should not have received monetary support of more than 10 lakhs under any Central or State Government scheme.
- Preference is given to business models which benefit the country and society both socially and economically and are of national importance.
- The business should involve Technology in every possible way
- Indian promoters in the startup should at least hold 51% of the shareholdings at the time of application.
- Startups can benefit only once from this scheme
Seed Fund to an eligible startup by the incubator shall be paid as follows:
- Up to Rs. 20 Lakhs are given as a grant for validation of Proof of Concept, product trials, or prototype development. The funding shall be provided in installments based on the companies’ milestones. These milestones may include developing, testing, and building the product ready for market launch.
- Up to Rs. 50 Lakhs of investment is provided for market entry, commercialization, or expansion through convertible debentures, debt, or other debt-linked instruments.
Seed funds should strictly not be used by startups to create any facilities and should be utilized for the purpose for which it has been granted.
This scheme is essential as it provides the company with the funds before commencing the business and will also help read the stability.
It will also reduce the risk of entrepreneurs and support in collaboration with partners. It will also make up for any insufficiencies.
How much seed capital to raise?
This question is one of the most frequently raised ones, and the instant answer that comes to it is ‘the more, the better. But you must proceed with caution. More funds will also mean more liability on your part and more equity stakes being given away.
A simpler way to come to a decision is to decide how many months you need the funds for. For example, let us say you need the funds for the next 12 months. And for each month your expenses come to around Rs. 50,000.
So, you will be looking to raise Rs. 6,00,000 (50,000 *12) from your seed funding round. But do ensure you can raise enough funds to help your startup grow to the next level.
Seed Funding Companies in India
- Here is a list of top seed funding companies in India are:
- Blume Ventures
- AngelList
- Lets Venture
- Venture Catalysts
- Y Combinator
- Endiya Partners
- Accel
- Indian Angel Network
- CIIE
- Mumbai Angels.