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Seed, Grants, and Funding Rounds: What’s the Difference?

Seed funding, grants, and funding rounds are all different ways that startups and entrepreneurs can raise capital to start or grow their businesses. PHOTO: Vitaly Taranov/Unsplash

Seed funding, grants, and funding rounds are all different ways that startups and entrepreneurs can raise capital to start or grow their businesses. PHOTO: Vitaly Taranov/Unsplash

The journey of a startup begins with an idea. The idea could be inspired by a personal experience, an industry trend, or a gap in the market that the founder has identified. But have you taken time to know how this vision of a simple idea becomes a global phenomenon that generates billions of dollars in funding and revenue — with curious interest from all parts of the world?

Well, let’s take you through this.

The journey

Once the idea has been validated, the founder(s) is(are) expected to create a business plan outlining the startup’s goals, strategies, and tactics. At this stage, the startup is considered to be in the idea stage. Once the business plan has been created, the founder(s) then sets out to build a minimum viable product (MVP) to test the idea in the market.

The MVP is a basic version of the product or service that can be used to gather feedback from potential customers. The feedback received from the market is used to refine the product or service and create a better product-market fit. This stage is known as the product development stage.

After refining the product or service, the startup is then ready to raise funds. At this stage, the founder(s) can choose to bootstrap the startup using their own savings, or they can seek external funding from investors.

If they choose to seek external funding, the founder(s) will create a pitch deck outlining the startup’s business model, market opportunity, traction, and growth plans. They will then reach out to potential investors, such as angel investors or venture capitalists, and pitch their startup to them.

If the investor sees potential in the startup, they will negotiate the deal terms and invest in the startup. This stage is known as the fundraising stage.

Pre-seed round

This is the very first stage of fundraising for a startup, where the entrepreneur or founding team raises a small amount of money to validate their idea, develop a prototype, and build a founding team. The pre-seed round typically comes from the founder’s personal savings or from friends and family.

The process of raising a pre-seed round typically involves reaching out to potential investors, such as angel investors, venture capitalists, or accelerator programs. In Africa, some notable pre-seed investors include Seedstars, Village Capital, and the Africa Business Angel Network (ABAN). These investors may provide funding, mentorship, and networking opportunities to help the startup grow and succeed.

The amount of funding required for a pre-seed round can vary depending on the startup’s needs, but it is typically a small amount of money that is used to validate the idea and build a founding team.

In Africa, pre-seed funding can range from a few thousand to tens of thousands of dollars.

Seed round

A startup is typically ready for a seed round when they have achieved some initial traction and have a working product or service that is gaining traction in the market. The goal of a seed round is to provide the startup with the necessary funding to scale the business, expand its team, and further develop its product or service.

In Africa, a startup that is ready for a seed round may have already acquired its first customers, generated some revenue, and have a clear plan for scaling its business. For example, a healthcare startup that is providing telemedicine services to underserved communities may have signed up several hospitals and clinics as customers and demonstrated the effectiveness of their platform.

The process of raising a seed round typically involves reaching out to angel investors, venture capitalists, or seed-stage funds. In Africa, some notable seed-stage investors include Ventures Platform, TLcom Capital, and Microtraction. These investors may provide funding, mentorship, and networking opportunities to help the startup grow and succeed.

The amount of funding required for a seed round can vary depending on the startup’s needs, but it is typically a larger amount of money than a pre-seed round. In Africa, seed funding can range from tens of thousands to hundreds of thousands of dollars.


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Grants

A grant is a non-repayable sum of money that is given to a startup or organization for a specific purpose. Grants can come from a variety of sources, including government agencies, non-profit organizations, and private foundations.

Grants are often awarded based on the merit of the startup’s idea, its potential for impact, and its ability to execute its plans. In Africa, a startup that is ready for grants may have a social or environmental impact focus, and their work aligns with the mission of the grant-making organization.

For example, a startup that is providing renewable energy solutions to off-grid communities may be eligible for grants from organizations that focus on sustainable development.

The process of applying for grants typically involves researching and identifying grant-making organizations that align with the startup’s mission and work, preparing a grant proposal that outlines the project or initiative that the funding will support, and submitting the proposal to the grant-making organization.

In Africa, some notable grant-making organizations include the Tony Elumelu Foundation, the African Development Bank, and the Mastercard Foundation.

The amount of funding provided through grants can vary widely depending on the grant-making organization and the scope of the project or initiative. In Africa, grants can range from a few thousand to millions of dollars.


ALSO READ: MASTERCARD FOUNDATION UPSKILLING AFRICAN WOMEN IN TECH


Funding rounds

These are typically the stages of investment that a startup goes through as they grow and scale its business. Each funding round is designed to help the startup reach specific goals, such as expanding its team, developing new products or services, or entering new markets.

A startup may be ready for a funding round when they have achieved significant traction in the market, have a proven business model, and need additional capital to achieve its growth goals. The process of raising funding typically involves reaching out to investors, preparing a pitch deck that outlines the startup’s business and growth plans, and negotiating deal terms.

In Africa, startups may reach out to a variety of investors, including angel investors, venture capitalists, private equity firms, and corporate investors. Some notable investors include Naspers, Helios Investment Partners, and the International Finance Corporation (IFC).

The amount of funding required for a funding round can vary depending on the startup’s needs and goals. The different funding rounds typically have different names, such as Series A, Series B, Series C, and so on, with each round indicating a different stage of the startup’s growth.

The difference between these lies in the amount of capital raised, the stage of the company, and the level of risk involved. For example, a Seed round typically involves raising a smaller amount of capital, usually less than $1 million and is focused on helping the startup get off the ground. A Series A round typically involves raising a larger amount of capital, usually between $1 million to $10 million, and is focused on helping the startup scale its business.

In summary, seed funding is the initial capital raised by a startup, grants are non-repayable funds awarded for a specific purpose, and funding rounds are structured rounds of investment from venture capital firms and other investors at different stages of a company’s growth.

To conclude, a startup may be ready for a funding round when they have achieved significant traction in the market and have a proven business model. The process of raising funding typically involves reaching out to investors, preparing a pitch deck, and negotiating deal terms.

ALSO READ: VC4A CALLS FOR APPLICATIONS TO THE VC4A VENTURE SHOWCASE AFRICA

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