What is Seed Capital?
Seed capital or seed funding is one of the initial stages of funding required to get a business started. It is important for the entrepreneurs to plan for finances as soon as they have decided to start a new venture because expenses are incurred from the very beginning, even before the company becomes operational. Seed funding can come from business owners, friends, and family to support preliminary activities such as market research, business plan development, product research, and development.
Seed funding usually makes for the smallest (by amount) in the stages of funding.
The basis on which the seed capital stage investments are made primarily depend on entrepreneur’s track record, skills, business capabilities, and the products strengths, the potential behind the business/business idea. Even though it is the riskiest stage of investment, it has substantial rewards. It is considered high risk because at this point the business isn’t fully functional and there is no track record. However, investors are willing to provide seed capital funding because they are looking for a stake in the company.
Sources of Seed Capital
It is more likely for the venture capital or angel investment to provide greater funds which are necessary to get business up and running once a startup has demonstrated feasibility. Hence, at this stage, the entrepreneur will usually dig into his personal savings or reach out to family and close friends. Early stage VC or incubators are another option but at current they are saturated and getting funding from them can be difficult.
Purpose of Seed Funding
Since the business is still in its conceptual stage, funds are needed to finance the preliminary activities. The amount of money required is generally small for startups in the conceptual phase. The amount the seed capital investors may contribute to a startup is determined by the business owner’s skills, business capabilities, track record, and the potential of a product or service. The seed capital covers the initial operating expenses till a business case can be made. At that stage, the business can get funding from angel investors and VCs. To learn more about the stages of funding please read our detailed article:
5 Stages of Startup Funding.
Investors are willing to provide seed capital funding because they are looking for a stake in the company and they see the potential for making a profit. Several investors are likely to provide funds once it reaches a growth stage in order to finance further operations of the business. However, they will get less stake for their investment as compared to an investor who seeds the initial investment.
