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. Seed capital comes in different shapes and sizes, here are some suggestions of capitals you might have heard about: 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 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 is seed money given by an angel investor, who provides seed money for capitalists in exchange for capitalists giving investors part of their business. 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. 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. 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. 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: This is where investors like the idea you're presenting but need more proof that they're making a good investment. 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. 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. 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. There are several pros and cons to seed capital; here are some suggestions: 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. Types of Seed Capital
Venture Seed Capital
Crowdfunding Seed Capital
Angel Seed Capital
Accelerator Seed Capital
Who Needs Seed Capital?
When Should I Use Seed Capital?
How Does Seed Capital Work?
Pitch Your Idea to Seed Investors
Show Proof of Seed Money
Negotiate Seed Capital Terms
Pay Seed Investors Back
Pros and Cons of Seed Capital
Pros
Cons
Final Thoughts
Seed Capital FAQs
What is seed capital?
Seed capital is seed money that investors can use to help cover startup costs. This seed money can be given to entrepreneurs or capitalists, depending on the terms of their agreement.
Who needs seed capital?
Entrepreneurs who are just starting out with their own business venture may need seed capital in order to create a solid financial foundation for their company. This seed money can help cover costs like supplies, marketing materials, and salaries.
When should I use seed capital?
Before the business grows too big, capitalists will offer seed capital to entrepreneurs in order to get their company off the ground. After capitalists receive seed money back within a specific amount of time, they're able to give seed money again.
What are some types of seed capital?
There are a few different types of seed capital, including venture seed, crowdfunding seed, angel seed, and accelerator seed.
How does seed capital work?
After seed capitalists have been introduced to entrepreneurs, seed money providers will agree on the amount of seed money they'll invest. This seed money is then repaid within a specific time frame with interest attached. After this seed money has been repaid, investors can either take a percentage of revenue or sell their stake in the business.
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.
To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.