When a company gets its first significant round of funding, it is known as a seed round. One of the most important differences between venture capital and seed funding is the amount of money initially invested in the startup.
Typically, seed funding does not surpass the one million dollar mark, while venture capital funding runs into the millions. The purpose of seed funding is to help keep the startup afloat while its founders search for their next round of significant funding.
Seed funding differs from venture capital because it doesn’t come from institutions. Instead, the individual investors could result from crowdfunding, angel investors, or family and friends.
Critical Purposes of Seed Funding
A lack of funding makes it very difficult for startups to make the initial profits to help grow their business. Additionally, these companies often struggle to raise capital from banks and other lenders because they don’t have an operating history.
Therefore, seed funding allows the startup to create a business model and find business partners. It also provides liquidity and the flexibility to adjust to market demands.
Raising seed money to fund a startup requires planning because these investors want a good idea of the vision and goals of the company. Therefore, the startup needs an idea, a product, the market fit, and the real growth potential of the product.
Most Successful Startup Seed Rounds in History
Interestingly, the world’s most successful seed rounds aren’t all U.S.-based. The top five include Bytedance, Stripe, SpaceX, Klarna, and Instacart. Let’s take a closer look at them:
1. Bytedance
Founded in 2012, Bytedance is a Shanghai-based internet technology company with several creative content platforms, including TikTok, Resso, and Helo. It also includes several platforms explicitly created for the Chinese market. Its outlets have created a world where users can easily create content, consume it and connect with others.
With a valuation of just under $300 billion today, Bytedance’s seed funding amounted to $250,000. The company has raised $9.4 billion over 12 rounds from 29 investors, including Sequoia Capital, SIG Asia Investment, Softbank Group, and Kohlberg Kravis Roberts.
2. Stripe
The payments processing software startup and e-commerce APIs based in the U.S. was founded in 2010 by Patrick and John Collison. In its early stages, the two brothers hailing from Ireland managed to raise $2 million. The company has had several investor rounds, but Sequoia remains one of its main ones. Other angel investors that put in money at its seed include Elon Musk and Peter Thiel.
Stripe has expanded its offerings to include Terminal, its point-of-sale device, subscription-based payments and invoicing, card issuing services, custom reporting, and fraud and risk management. Recently Stripe’s valuation fell from $95 billion to $74 billion in an IRS-regulated process.
3. SpaceX
Elon Musk’s SpaceX recently announced a massive new round of funding as it works to make space travel cheaper with its next generation of satellites and space rockets. Founded in 2002, SpaceX has an estimated valuation of $127 billion. Based in Hawthorne, California, the company has already raised $10.1 billion from its 31 funding rounds.
Space X has 75 investors, including the Founders Fund, Draper Fisher Jurvetson, Rothenberg Ventures, and NASA, and started with a seed funding amount of $100 million.
4. Klarna
Swedish-based Klarna provides e-Commerce payment solutions for retailers and their shoppers. Founded in 2005, the winning formula of the fintech platform is that consumers can choose between making direct payments or installments.
The company has completed 27 funding rounds, raising a total of $4.5 billion, but started with a seed funding of $1.5 million. Its investors include Institutional Venture Partners, Sequoia Capital, and General Atlantic. Recently Klarna’s net worth crashed from $45.6 billion to $6.7 during the current turmoil in the global stock markets.
5. Instacart
Founded in 2012, San-Francisco-based Instacart allows customers to order from their favorite stores for deliveries or pick-ups. In its seed funding stage, the supply chain startup raised $2.3 million from six investors, including Khosla Ventures, Kleiner Perkins Caufield & Byers, and the Collaborative Fund.
Recently the firm’s valuation dropped from $39 million to $14.7 billion, caused mainly by the downturn in supermarket spending caused by slower growth and rising inflation.
Final Take
Seed investments form a critical part of the funding for startups. Even though it often seems impossible to find the money for new ideas, some concepts and startups always attract considerable amounts in their seed rounds. However, this does not always mean they will become an overnight success since building an empire like the companies mentioned above takes time.
