Seed Capital Fundraising: Definition & Overview

KEY TAKEAWAYS

• Seed capital is how much money can get raised to help develop a new business or product idea.
• Seed capital is usually intended for only the essentials in the early stages of a company.
• Once seed capital is secured, startups can approach angel investors or venture capitalists for more financing.
• Angel investors are high net worth professional individuals.

What Is Seed Capital?

When you hear the term seed capital, it refers to certain financing that’s used in forming a small business or startup and bringing the business to life. Funding can come from several different areas and it’s usually in exchange for an equity stake for future company success.

Or, it could also be in exchange for shares in the profits of a product that you sell and offer to customers. Typically, seed capital can come from those that you’re closest to. This includes family members, friends, and other people that you might know. It can also come from angel investors with high net worth.

Getting your hands on seed capital is one of the four funding stages required for startups to become established businesses. You want to take your viable business idea and turn it into a success.

When you first start out, it can be difficult to access funding or it might be limited. If you were to approach financial institutions or professional investors, they could be hesitant to invest because you don’t have a track record.

More often than not they want to see an established history or some type of success. This helps prove that what you’re doing is feasible and worth their investment.

Seed capital can also get referred to as seed financing or seed money because it’s money to help your business grow. It comes in the early stages and the total amount doesn’t have to be a lot. Why? Because the money generally covers essential needs, like a business plan.

It can also go towards other initial operating expenses. Things like insurance, rent, business equipment, payroll, and research and development will cost money. But they’re important to invest in early to help set your business up for success.

Are There Any Special Considerations with Seed Capital?

Usually, a startup will have to transition through four different phases of investment before it’s established. These phases include the seed stage, venture capital, mezzanine funding, and finally an initial public offering (IPO).

It was mentioned above, but typically seed capital is only intended to help get things moving. It’s meant for initial startup costs and to help reach early goals. But, as you become more successful you can draw the eye and catch the interest of a venture capitalist and angel investors.

When this happens, they’re more likely to invest large sums of money in the startup before it moves any further. They want to help shape the future of the startup and build it into something big.

Mezzanine financing can also be a necessary step to go through. However, this type of financing is more common for startups that have some type of proven track record. Finally, the last phase is the IPO.

This is when all the early investors will receive a large payday for their initial investment. An IPO is intended to raise additional funds and sufficient capital to continue to grow and expand.

What’s the Difference Between Seed Capital and Angel Investing?

While seed capital typically consists of smaller amounts, angel investors might be likely to invest higher sums. An angel investor will often provide the money through some type of loan or for an equity stake in the company.

These types of investors are usually high net worth individuals and can often come from a personal network. They like to have a hands-on role in the business and help build the startup from the bottom up.

This is an ideal situation for a startup since they have sufficient funding to build the company the way they envisioned. But, when an angel investor invests over $1 million, they often like to have an equity stake.

What’s the Difference Between Seed Capital and Venture Capital?

As mentioned above, seed capital is intended to help develop a business idea from the early stages. Once the startup has built a track record and a solid history, it would approach venture capitalists for new investment.

A venture capital firm would usually provide a large sum of money for a stake in the business. It would help with everything from product development, prototype production, and market research. All of this is intended to help gain a competitive advantage and make the startup as successful as possible.

Summary

Seed capital is the first type of investment that a startup will receive. It can often come from those closest to the founder, like friends, family, and other acquaintances. The funding is usually used for the most essential business costs of a startup and is usually for early-stage businesses.

These things can include business proposals, rent, payroll, insurance, and other necessary areas needed to get to the next stage. Once the startup builds history and a solid track record, it can approach venture capitalists or explore mezzanine financing for more funding. The ultimate goal is to reach an IPO, so the company can keep growing and investors see a positive return.