Seed Capital: Definition, Importance, Use, How to Obtain?

The earliest stage of the capital-raising process is often tricky, and seed capital plays an important role in laying the foundation of the business. Learn about seed capital in this blog.

The initial stage of a business project can be quite daunting, with numerous financial challenges. 

From the viability of the chosen business model to the cost and income structure, and ultimately definition to reach the break-even point, ventures are not easy to start. Financial support forms the foundation of a thriving business, and seed capital plays a crucial role in making that base.

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What is Seed Capital?

Seed Capital is initial financing to create a microenterprise or allow the takeoff and/or consolidation of existing business activity. Once the business is established and running, other types of funding, such as venture capital or crowdfunding, can be used to grow the business.

 As we can infer from its name, this type of initial financing lays the foundations of a project.

Seed capital is usually seen in projects with high growth potential, such as new companies, small companies, medium-sized companies, new niches, SMEs or startups with scalability within a specific market. Normally these first funds come from family, couples, partners, and friends.

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What is the Use of Seed Capital?

The seed capital covers the initial expenses of creating a business project. These expenses do not refer to the business costs of producing a product or the rental and supply expenses but to the investment that must be made when developing an idea or product.

Seed capital is used to carry out market studies, translate an idea into a product or service, create a business plan that defines the new company’s activity, and study the business’s viability.

Where Does the Seed Capital Come From?

The first step to getting the initial investment is to convince family and friends to contribute. Once you have that first amount, the market evaluation and the idea’s development follow. If you meet these two requirements, it is easier for people outside your social circle to trust the project.

The money from family and friends is usually equity (capital that must be returned in case of liquidation or closure of the company to those who have contributed it). 

This initial contribution will always be a riskier bet than the usual venture capital since investors will put their money at the disposal of a business idea that has yet to be developed without a business plan.

How to Obtain Seed Capital?

Prepare a creative business idea that can be commercialized and a compelling pitch for the investors. You must have a well-documented business plan discussing the product idea, target market, business potential, competitors and their standing, and the business’s financial projections.

There are five ways to generate seed capital.

Find an investor

Following Warren Buffet’s famous phrase, “let’s not put all our eggs in one basket“. Seek investors who look for promising projects to put money in. One example is angel investors. They are high net-worth individuals with a fortune and look for projects with a promising future. They even serve as mentors during the early stages. Accelerator funds grant seed capital in the initial stage of ventures.

Must Read – Learn All About Angel Investment

Use your savings

If you have managed to save a sufficient amount to start a business, this money can be very helpful. It will be a better idea than going into debt.

Crowdfunding

If you have designed a company with a social purpose or a highly innovative alternative, there are donation platforms that can help you raise the capital you need. You need to be clear about your company’s purpose, a narrative that engages the audience that reads your case.

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Family and friends

You can get seed capital through your contacts to achieve your dream. Remember to present your business plan where you solve a problem you are passionate about. It is also a good source to create a multidisciplinary team for your company. Communicate the opportunity and the risks involved in the venture in case things turn out differently than you thought.

Venture Capital

Venture capital companies typically go into a fundraising round after the initial one, but some provide seed money. They are very ethical and stringent in their evaluation. You might need to meet them several times to convince them.

Once you have enough seed capital and have laid the foundation of your business, you can reach out to banks to seek loans and grow your business. Financial entities such as savings banks and banks offer loans to borrowers with a good credit history.