The Difference Between Seed Funding & Early-Stage Funding
As a decentralized alternative investment fund, Polka Ventures provides seed and early-stage funding. Let’s dive into the meanings of these terms and highlight the major differences between both.
Starting a business is expensive — even the simplest business idea requires startup funding. After all, computers and equipment are not free. Seeking external financing is logical if you have a business idea you want to bring to fruition. Interestingly, you can choose from different levels of financing during the startup stage and the first years of business. Then, you only need to find the right investor at the right business stage.
What is Seed Funding?
Seed money is the funding collected from investors and used to start a business. For example, if you’ve developed accounting software, and your mom invests $10,000 into it, that’s seed money. Also, if your software is revolutionary, angel investors may like your product and help develop and mass-produce it. However, they own a percentage of your business as the returns for their investments.
You can either pay them back once the business makes enough profit or have them sell their stakes to other people looking for startup investment opportunities.
What is Early-Stage Funding?
Let’s assume that your accounting software has been fully developed and is being produced and shipped to customers. Now you want to expand by adding employees or streamlining your production. Even if you are turning in profits, it may not be enough to cover the costs of daily operations and the expansion. This is where early-stage financing comes in.
There are two parts of early-stage financing — Series A and B. Series A financing generates more funding than seed funding, but the risks are higher. Venture capitalists are most likely to invest in your business at this stage, and the method of raising funds involves allotting preferred stock to investors.
If additional funding is needed after your company starts making a profit, Series B financing can help you create funds. In addition, series B funding helps increase production, execute a marketing plan, and compete with competitors head-on. The criteria for funding during this stage are evaluating the profit forecasts, how your company stacks up against its main competition, and whether intellectual property is involved, and if so, its value in the marketplace.
The funding limits in Series B are higher than Series A, but the risks are lower.