What is Seed Capital and how it works?

Seed capital is the initial funding needed to start a new business, and cover startup costs like business proposals and research. It also covers proof of concept, demonstrating that a business idea is feasible. Investors usually include friends, family, and people close to the business owner during this stage. Once a business is established after the seed stage, a company can get investments from venture capitalists, angel investors, and financial institutions. To gain a better understanding, it’s important to know how seed capital works. 

What is Seed Capital?

The term seed capital refers to financing used to form a startup. Funding is provided by private investors—usually in exchange for an equity stake in the company or a share in the profits of a product. Much of the seed capital a company raises may come from sources close to its founders, including family, friends, and other acquaintances. The first stage of four funding stages for a startup to become an established business is obtaining seed capital. 

A company that is first starting out may have limited access to funding and other sources. Banks and other investors may be reluctant to invest because it has no history or established track record, or any measure of success. Many startup executives often turn to people they know for initial investments—family and friends. This financing is referred to as seed capital. It can be—called seed money or seed financing—is referred to as such because it is money raised by a business in its infancy or early stages. It doesn’t have to be a large amount of money. Because it comes from personal sources, it’s often a relatively modest sum. Seed capital is often used to pay for: Business plan, market research, prototype development, equipment, marketing budget, legal cost, ect. 

How does it works?

An idea itself may not be enough to get investors or financial institutions interested in giving a business money, which is why seed capital plays a crucial role in legitimizing and solidifying a founder’s business concept. It can come from many sources: the founder’s own funds, their family and friends, angel investors, and even crowdfunding. 

How to get itl?

Seed capital usually involves investments from friends and family, making it a unique way to start a company. Because of these personal relationships, seed capital can often be easier to gather than other types of capital. But it’s not always easy to convince people you know to loan you money or invest in your business idea. The best way to raise it is to present your business idea professionally, even if your investors are your close friends and family. It’s essential to set the terms of the investment exchange in writing and consider how much equity you’re willing to give away. 

Example of Seed Capital

Alphabet, the parent company of Google, provided seed money to the Center for Resource Solutions in 2016 for a project to implement renewable energy certification programs in Asia. 

Seed Capital vs Venture Capital

Seed capital and venture capital are often used as synonyms, and they tend to overlap. Seed capital is generally used to develop a business idea to the point that it can be presented effectively to venture capital firms that have large amounts of money to invest. If venture capital firms like the idea, they generally get a stake in the new venture in return for investing in its development. Venture capitalists provide the lion’s share of the money needed to start a new business. It is a considerable investment, paying for product development, market research, and prototype production. Most startups at this stage have offices, staff, and consultants, even though they may have no actual product.

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