How does Seed Funding work?
Seed funding is often confused with start-up capital when in fact it’s a completely different ball game. Whilst seed funding can help a business develop an idea, produce its first product and then help with the marketing, start-up capital is specifically for brand new companies. Seed funding is usually required by businesses who are around a year old and haven’t been able to develop or bring their product or service to market successfully. These companies still tend to be very young and are lacking more than just funds. The core management structure usually needs some work too. So how can seed funding support these kinds of companies?
Where to get Seed Funding
In most instances seed funding is provided by angel investors or other private investors who may have an interest in the company. The funds needed in a seeding money investment are usually smaller when compared to regular business investments. Seed funding amounts are often dependent upon the size of the business and its plans. The amounts invested are designed to provide enough capital to prove that the business concept is viable, as well as mitigating some of the risk involved.
The problem with seed funding is that many people believe they need a larger sum than they actually do. There’s a belief that to attract venture capital fund managers you have to ask big – but this isn’t always true.
Seed Funding for Perspective
Securing seed funding is a great way of giving yourself some time and capital to see if your business is viable and to gain an insight into whether further investment on a larger scale is worthwhile. This clearer picture will in turn help you develop your long-term business plan and assess and analyse which types of business investment are viable for the future or indeed if they’ll be necessary. There are a few points to keep in mind however, if you are considering bringing in an investor through seed funding:
- The investment amount may be small but you will have to hand over a percentage of your business to the investor
- You may have to let potential investors know the intricate and sensitive ins and outs of your business.
- The majority of private investors will only invest if there’s the chance to make 30% or more in returns on their investment. You need to be sure your business can afford this amount of return before accepting.
Seed Funding versus Venture Capital
As already mentioned seed funding investments are usually considerably smaller than venture capital. Venture capital investment is only for big companies with large balances, whilst smaller and medium-sized companies in their infancy can benefit from seed funding. Individuals with new businesses are almost guaranteed a rejection from most venture capitalists.
Seed money usually comes from personal funds of private or angel investors. A realisable and workable business plan is still necessary, so it’s not some ‘get rich quick’ scheme that can be picked up and put down as you feel necessary. You’re committed to working with a partner who will have a considerable influence on the future of your business venture.
Seed funding is an option for all SMEs looking to conduct further research and work on their business in a positive way, developing it into a potentially huge success in the future.
Author: Carlo Pandian is a freelance blogger covering the start-up scene in Asia, small business marketing and technology. He also writes how to guides about Intuit QuickBooks bookkeeping software and loves sharing tips with the community of Project Eden.