Bringing new business to life
With only one third of all new business ventures making it past their first year, it is wise to try and stack the odds for success. One of the best ways to achieve this is through sufficient financing. In a start-up situation this is known as Seed Capital.
What is Seed Capital Funding?
Seed capital refers to the money a business uses to get started. It is typically provided as a cash investment or debt financing and is often used to pay for start-up expenses. The term “seed” originates from the idea that companies use these investments to plant the seeds of their growth. Though seed investment can be risky, it can also be extremely rewarding for investors and entrepreneurs alike.
What is Seed Capital used for?
Seed capital is the initial funding used to start a business. It is usually provided by investors, venture capitalists, or government grants. A new venture uses seed capital to cover the costs associated with launching a business. Examples include developing a product, hiring employees, setting up a website, marketing, and other initial expenses. Another use of seed capital is to attract additional investors and generate more capital for future growth. Although seed capital is the life blood for a new business, the monetary value of seed capital investment is typically smaller than later-stage venture capital investments.
How does Seed Capital work?
Seed capital is a type of early-stage startup funding that helps new businesses get off the ground. This type of investment commonly comes from angel investors, venture capitalists, or other sources of private funding. A new business will use seed capital to finance the company until it can generate enough revenue to become self-sustaining.
Show me the money!
When seeking seed capital, there are several different types of investment a business can try to secure. Each option is unique in the way it works and the benefits it offers.
This is a type of funding that relies on limited resources, such as personal finances, friends and family, or an initial small investment. It is the most common form of seed capital and is often used as a way to start and grow a business without raising large amounts of outside capital. The term “bootstrapping” comes from the phrase “pulling yourself up by your own bootstraps'' and implies that the owner is self-sufficient and able to build a successful business without outside help or large investments.
Angels investment is private equity investment that comes from wealthy individuals, known as angel investors. They provide capital to startup or early-stage businesses in exchange for equity ownership. Angel investments are typically small amounts of capital (usually $25,000-$100,000) used to help new businesses get off the ground. Angels may also provide mentoring and advice to the entrepreneurs they invest in.
An increasingly common source of seed funding where large numbers of people contribute small amounts of money to a business or project pitch. Crowd funding is usually done via the internet on platforms such as Kickstarter, GoFundMe, and Indiegogo. With crowdfunding, individuals, businesses, and organisations can raise funds to finance new products, services, or other projects and can choose to reward investors with discounts and promotions rather than equity.
Incubators and Accelerators
Another source of seed capital is from organisations that provide finance and other resources to help entrepreneurs launch and grow their businesses. Incubators provide mentoring, networks, access to funds, and other services to help startups get off the ground. Accelerators are similar but focus on helping startups grow quickly and scale up to become successful companies. Both incubators and accelerators provide a valuable service for entrepreneurs and offer an important source of seed capital and support for startups.
A good pitch makes all the difference.
How to secure Seed Capital.
Securing seed capital isn’t always easy but with several different avenues available, it’s certainly achievable.
Bootstrap: Invest your own money or resources to get your business off the ground.
Crowdfunding: Raise funds by pitching a business to a large number of people online.
Angel Investors: Pitch an idea to wealthy individuals or groups in the hope of securing investment.
Bank Loans: Apply for a start-up loan from a bank or other financial institution.
Grants: Apply for grants from nonprofit organisations, government entities, and other sources.
Venture Capital: Pitch a business idea to receive investments from venture capitalists in exchange for equity.
What are the pros and cons associated with Seed Capital?
From a start-up perspective, seed capital offers a low-cost finance option that enables a business to get up and running without incurring significant debt. Seed capital also provides liquidity and can be used to hire employees, purchase supplies, and build infrastructure, allowing start-ups to become operational quickly. It also provides entrepreneurs with the resources to conduct market research, develop and test products, and gain access to potential customers.
Furthermore, seed capital can help start-ups attract additional investment in the future, as investors are more likely to invest in companies with a track record of success.
For investors, seed capital is a long-term investment option. By investing in the early stages of a company, investors can potentially earn a high return on their investment when the business grows and succeeds.
While seed capital is required to get a business up and running, there are some negatives every business should be aware of. Many seed investment offers come with strings attached, such as giving up equity or taking on more debt, which can limit a company’s future growth.
There is also the possibility a start-up may find itself in a difficult position if they are unable to generate enough revenue to repay the initial seed capital investment. Finally, securing seed capital investments is subject to a high level of competition, making it difficult for entrepreneurs to secure the funds they need.
From an investment perspective seed capital carries a high risk factor. Many new businesses fail within the first year so investors must accept the possibility of losing their entire investment.
Seed Capital, a business can't grow without it.
To sum up, seed capital is the initial funding a business uses to get up and running. Initial funding might be from informal investments by family and friends or a more formal arrangement with angel investors or government grants. Whatever form the seed capital takes, businesses use it to turn their ideas into reality and hopefully reach a point where they can seek further investment to continue their growth in the future. Therefore the more seed capital a start-up can secure, the better their chances of surviving and thriving.