Seed money, also referred to as seed funding and seed capital, is a form of funding in which an investor invests their capital into a start-up in return for an equity stake or for a share in the profits of a product.
The term ‘seed’ suggests that it is very early investment which is meant to support the initial growth of business until it can of its own, or until it is ready for further investment.
A new start-up business may have limited access to funding and resources, and once the initial fees for company formation, computer hardware and software, materials, and office space (if required), are met, then there may not be a lot of money left over for the development of the business’s products and services.
At the start-up stage a business won’t have built up any trust or a credit rating with financial institutions. This can make accessing loans from bank and other investment portals very difficult.
Seed funding will typically be accessed to cover the initial costs of getting the business up and running, such as for developing a business plan and initial operating expenses including rent, payroll, business insurance, and even research and development costs (R&D).
A great proportion of the seed capital a start-up business raises typically comes from sources close to the company’s founders. These investors could be family, friends, or other acquaintances.
Seed capital is the first of five official funding stages that can help a start-up business become established.
It can be tempting as a founder of a start-up to accept the first deal that is presented to you, but seed funding is like any other business decision and takes time and thought to get it right.
Get your timing wrong and you could miss the boat and lose momentum if you’re late in seeking funding. However, if you’re too early you could damage your reputation. For example, you look for investment in a product which you haven’t tested yet, so you don’t know if it will work. Or you haven’t done your market research to see if there’s a market for your product.
Watch past episodes of Dragon’s Den and you’ll get a clearer picture of some of the mistakes that can be highlighted which could damage your reputation if you’re unprepared.
The sum of funding that you might need will depend on your business, it’s products and services, and the long-term goals of the business.
As a start-up business owner, you might want to raise enough cash simply to grow enough take part in additional funding rounds. You may look to seek enough funding to become profitable. The choice is yours and will depend on your vision and ambitions for the business.
Seed funding only represents a single stage in a business’s funding cycle. Typically, it is the second stage in the cycle, with series funding stages following seed funding.
Funding timeline for businesses from pre-seed to IPO.
Understanding the different funding rounds will help you understand and evaluate prospects for growth.
Each funding round operates in a comparable manner; investors offer cash in return for an equity stake in the business. For each round, the investors make different demands on the start-up.
Despite companies having different risk profiles and maturity levels at each funding stage, seed and Series A, B, and C investors all help business ideas come to fruition.
Series funding enables investors to support entrepreneurs with funds to fulfil their dreams, which can result in both the entrepreneur and the investor cashing out together at the IPO stage.
There are many different forms of funding for businesses of all sizes, including:
It is advisable to speak to your financial advisor or your business bank manager for further details if you are looking to secure commercial finance.
At Caunce O’Hara, we are passionate about helping small business thrive. Our content covers many topics you may find relevant and useful to your business. Please do not take this content as professional advice. To find out more on a subject we have covered in out articles, please seek professional assistance.
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