Many people dream of owning a business but raising funds is critical to start a business. Businesses need funds to operate smoothly. People raise funds to purchase assets and have working capital for the day-to-day functioning of an organization. Seed capital is the initial stage of the fundraising process. The capital seed amount supports the initial operations of the company.
So, what is a capital seed amount? The capital seed amount is the initial capital used while starting a business. This capital is usually a person’s savings, and friends, family, or founders provide it. Sometimes this amount is borrowed from a bank as a loan.
The capital seed amount is used for:
- Market research
- Business plans
- Office rent
- Prototype development
- Equipment
- Patent costs
- Legal costs
- Consultancy fees
Not all ideas get enough investors who are interested in investing their money. The seed capital plays a significant role in solidifying and legitimizing the idea behind a business.
New businesses have a high chance of failure and are considered risky. However, some investors are interested in investing in new ventures because they want to invest before the company valuation becomes too high.
Generally, the seed capital is a small amount of money. It covers the initial operating expenses like rent, payroll, equipment and R&D costs. At this point, any business’s primary goal is to attract venture capitalists’ attention. The venture capitalists notice if the organization can do well with the seed capital.
Types of seed capital
Owner funds
Sometimes only the owner or founder of a business invests money in the business. This amount is sufficient to get past the development stage. The greatest benefit of this type of funding is that the owners do not have to give away equity shares in the initial stages of the business.
Angel investors
Angel investors are high-net-worth individuals who are willing to invest in a business in the early stages in return for equity shares. These investors look for businesses with sound business plans and solid management teams. They also play an active role in managing a business to protect their investment or remain a mentor.
Crowdfunding
Crowdfunding is raising money from many people to fund a business. Small amounts of money are collected from a large number of people through online platforms. Crowdfunding platforms enable interactions between fundraisers and the crowd. It is an ideal way for new businesses to get seed capital.
Incubators
Incubators refer to investors who initially provide small funds for the business and help it by providing office space and training. They do not expect equity shares from the businesses but help them to refine their ideas and build the enterprise from scratch. The main idea is to help the organization grow its business. Incubators are non-profit organizations run by private or public entities.
Accelerators
An accelerator funding provides limited funding, support and guidance in exchange for equity shares. An accelerator’s primary purpose is to accelerate a business’s growth.
It provides intensive guidance for a particular time. Highly experienced people provide mentoring programs to help the business grow. They identify all issues like building teams, conducting market surveys, creating infrastructure and obtaining financing.
Before starting a business, people must ask, “What is the capital seed amount needed for the initial stages?” Once the business successfully passes the initial stages, it will find many investors willing to invest. Sufficient funds help the business grow and succeed in the long term.
