Seed funding, sometimes known as seed money or seed capital, is a form of securities offering in which an investor invests capital in a startup company in exchange for an equity stake or convertible note stake in the company. The term seed suggests that this is a very early investment, meant to support the business until it can generate cash of its own or until it is ready for further investments. Seed money options include friends and family funding, seed venture capital funds, angel funding, and crowdfunding.
When going out to raise a seed round, while the team and their vision are a major factor, founders should also have a clear view of their go-to-market [strategy] and should be able to show some sort of initial traction.
Traditionally, companies that have yet to meet listing requirements or qualify for bank loans, recognize VC as providers of financial support and value-added services.
Seed money can be used to pay for preliminary operations such as market research and product development. Investors can be the founders themselves, using savings and loans. They can be family members and friends of the founders. Investors can also be outside angel investors, venture capitalists, accredited investors, equity crowdfunding investors, revenue-based financing lenders, or government programs.
Seed capital can be distinguished from venture capital. Venture capital investments tend to come from institutional investors, involve significantly more money, are arm’s length transactions, and involve much greater complexity in the contracts and corporate structure accompanying the investment. Seed funding is generally one of the first steps investors offer to get startups on their feet before they become fully operational. Seed funding involves a higher risk than normal venture capital funding since the investor does not see any existing projects to evaluate for funding. Hence, the investments made are usually lower (in the tens of thousands to the hundreds of thousands of dollars range) as against normal venture capital investment (in the hundreds of thousands to the millions of dollars range), for similar levels of stake in the company. Seed funding can be raised online using equity crowdfunding platforms such as SeedInvest, Seedrs, and Angels Den. Investors make their decision whether to fund a project based on the perceived strength of the idea and the capabilities, skills, and history of the founders.
There is a wide range of options and schemes to help entrepreneurs get seed funding. However, it is imperative to critically analyse the terms of payment, returns, dilution, and powers vested with the investors. Further, the investor’s sector expertise, financing capacity, and portfolio diversification shall also be considered while making a choice. Given the conducive environment for start-ups across the globe, a company shall witness considerable growth if the core team considers all the business and legal requirements.