What is Seed Capital?

The initial investment used to kickstart a new business is called the Seed Capital. It could be fronted by the founders themselves, their friends or family. This money is utilized to flesh out the idea of the business, and pay for the operational expenses of setting up the firm to attract angel investors. 

Although the channels of obtaining Seed Capital might be less formal, it usually involves trading a percentage of the stake in the firm. Seed Capital carries a high risk as the new business is yet to prove its mettle. Venture capitalists and banks wait until the business shows steady growth or performs on par with forecasts before making large investments in new businesses.

What are the Stages for Acquiring Seed Capital?

There are four various stages of acquiring capital to start a new business until going public. Seed capital from founders -> Venture Capital from accredited investors -> Mezzanine Capital from equities -> Initial Public Offering (IPO). Business owners usually utilize Seed Capital in getting the business up from the ground via market research, product design and development, producing the prototypes and taking it up from there. Seed Capital amounts depend on the owners standing, reach, reputation, network, track record, as well as the robustness of the product idea and its perceived benefits. 

Professional Angel Investors 

Seed Capital can also be provided by professional investors who are more involved in helping in the launch of a new business, guiding it at its initial stages, and overseeing everyday operations. They can offer it as a loan or in exchange for a percentage of equities in the new venture. If the investment amount is less than a million dollars, professional investors might offer it as a loan. 

The terms and conditions of this loan are pretty straightforward, require very less legal costs, come at low interest rates, and do not impose any contractual restrictions on the firm. If the angel investors decide to participate in the everyday operations and working of the company, a warrant to this effect is issued allowing the investor a seat at the board meetings. If the investment amount exceeds a million dollars, Seed Equity comes into play. This involves the private purchase of stocks in the company to help it raise capital without going public. T

he investors become part stakeholders in the company with voting rights. They could even come on board as co-owners. Seed Equities are more costly than Seed Funds but are more beneficial to the investors. 

Example of Seed Money

 Electronics Data System was established by Ross Perot with $1000 he had in his personal savings account. This way, his savings became the Seed Capital that would see EDA become a renowned information technology equipment firm.