What Is Seed Capital?
Seed capital is seed money or seed financing used for funding initial operating expenses and development before the company begins to make/take in revenue until it can support itself. This can be in the form of investment, grants, or anything of value that’s given to a new business. Much of these come from the entrepreneur and sometimes friends and family.
Types of Seed Capital
Seed capital comes in different shapes and sizes, here are some suggestions of capitals you might have heard about:
Venture Seed Capital
This type of seed money is used by entrepreneurs that are already in business. Venture seed capital allows businesses to explore new opportunities while still having the cash flow needed to make their existing business grow.
Crowdfunding Seed Capital
Crowdfunding seed capital allows seed money providers to invest in projects they’re interested in while gaining equity for their money. This is done by selling pieces of the company to business owners and investors that are willing to give seed money.
Angel Seed Capital
Angel seed capital is seed money given by an angel investor, who provides seed money for capitalists in exchange for capitalists giving investors part of their business.
Accelerator Seed Capital
Accelerators are seed money providers that offer seed money to capitalists in return for equity, mentoring, and guidance on maintaining a startup company. This is usually done with the goal of growing the company into something that will be attractive to seed investors.
Who Needs Seed Capital?
Seed capital is usually needed by startups or organizations with a new business/product idea. They typically only have an idea, but no money for research & development, market testing, promotion/advertising, and other initial costs. Thus, any start-up company would need to have seed capital in order for them to be able to go from idea to reality. For example, seed capital would be used for an individual to start up a restaurant. They might use this money to get the location, rent, decorate the space, and purchase equipment like tables and chairs. Another example is when someone starts up their own company online that has no physical storefront yet; seed money would be used for advertising in order to get people to purchase the products.
When Should I Use Seed Capital?
Seed capital should be used when you have an idea but don’t quite know where to start. It can also be used if your company is already up and running, but you want to target new markets that require seed money. Some people even borrow seed money from family members or friends if their idea is so compelling that they have the potential to become profitable soon after they startup. The only time seed capital wouldn’t be needed is if the business could already support itself with its own revenue.
How Does Seed Capital Work?
Seed capital is usually given after investors have found opportunities they like, but before the business gets too big. There are several ways how this works:
Pitch Your Idea to Seed Investors
This is where investors like the idea you’re presenting but need more proof that they’re making a good investment.
Show Proof of Seed Money
This is where the investors ask for proof that you will be able to successfully run your business. This documentary can include evidence like financial records, business plans, projections, and other documents to make capital providers more confident in the company they’re investing in.
Negotiate Seed Capital Terms
When entrepreneurs have been able to convince investors they want to invest in their company, seed money providers will usually offer capitalists several options for investing. An example of seed capitalists’ terms might be how much seed money is given and what percentage stake the investor has in the business. This seed money is often given with the stipulation that the capital must be paid back within a specific amount of time, typically 5-7 years. This is usually written into an agreement between investors and capitalists that outlines how much seed money has been given and sets deadlines for when it must be repaid.
Pay Seed Investors Back
Once seed capital has been repaid, investors will usually allow seed money providers to either take a percentage of revenue or to sell their stake in the business.
Pros and Cons of Seed Capital
There are several pros and cons to seed capital; here are some suggestions:
– seed money can help startup costs – seed capital can give you the credibility needed to attract seed investors – seed money can help investors feel secure in the capital they’re investing – seed capital can give seed investors a stake in the company – seed money can allow businesses to quickly grow and expand, which means they’ll be able to make profits faster
– seed capital is often given with the stipulation that capitalists must repay investors within a specific amount of time – seed money providers must be repaid before capitalists receive any of their capital back – seed capital providers may want to take a percentage of money returned, which can cut into capitalists’ profits – seed money can make entrepreneurs accountable to investors, not just seed capitalists – seed capital often comes with restrictions on how seed money is used
Seed capital is a good way for entrepreneurs and investors to network and build relationships, but seed money should be repaid as quickly as possible. The earlier capitalists can be paid back, the sooner the investors will feel comfortable giving them more seed money. The decision to use seed capital is ultimately up to you; determine whether or not seed capital will be beneficial for your business.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.