What is seed capital
Seed capital or seed funding is one of the types of financing for a startup during its formation. Investors give the seed money in the form of securities by providing the capital the business requires for an equity stake or future profits from the sale of products.
In most cases, seed capital is generated by the people close to the company’s founder, such as family members and friends. Once the startup is established, it can get further funding from financial institutions, angel investors, and venture capitalists.
When the company is in its seed stage, established investors and financial institutions may not finance it. So, the owners have to rely on their savings and little funding from people close to them. The seed capital is usually utilized for:
● Business plans
● Office rent
● Market research
● Development of prototype
● Legal costs
● Patent costs
● Early team payroll
How Seed Funding Works
Usually, the seed fund ranges from $250,000 to $2 million. Startups are considered high-risk investments, so they do not attract funding from investors and money lending institutions. Therefore, seed capital plays a vital role in establishing a startup. Seed money can either be a loan, a gift, or the owner’s savings.
Once the company has been established, the big financiers, venture capitalists, and investors can come through to invest further into the company.
Types of Seed Funding or Capital
There are several sources of seed capital. Here are a few of them
The founder of the starter can use savings and personal funds. Sometimes it is enough to get the company beyond the seed stage. You can also get your company beyond the seed stage without giving away equity.
Family and Friends Funding
One of the most prevalent sources of seed capital is from relatives and friends of the founder. In most cases, people close to the founder are the ones who believe in the concept and are willing to help out.
However, you should document the funding from relatives and friends thoroughly as it can result in broken relationships and legal suits. Let them know of the risks involved in the startup to be clear on what they are engaged in.
Angel investors are individuals with a high net worth value who are willing to invest in the early stages in exchange for an equity share in the business. Investors are likely to invest in a startup with a good business plan and an outstanding management team. Some play an active role in the mentorship management or are part of the board of members.
Another way startups can get seed capital is through crowdfunding. The startup owner can initiate an online campaign on SeedInvest, Kickstarter, IndieGoGo, AngelList, and WeFunder, among others.
In return, the investors can get equity shares while others get an early version or exclusive experiences with the company’s products.
Founders with a viable idea and a solid business plan can access seed capital through various sources.