Seed capital or seed financing, also called “seed money,” “seed funding,” or “start-up capital,” is the seed capital used when starting a business, whether it is for office processing, permits, licenses, inventory, product development, manufacturing, or marketing, with the aim of covering basic operating expenses so that the company can generate revenue on its own or until it attracts further investment.
This type of capital often comes from the personal assets of the founders, friends, relatives, or angel investors in exchange for an agreed-upon share of the company. The money can also come from the bank in the form of a business loan, in which the company makes monthly payments to repay the debt plus any interest or fees.
The amount of initial or seed capital that may be granted to startups in America and Europe ranges between $500,000 and $2 million, while the seed capital in the Arab world ranges between $50,000 and $200,000.
The importance of seed capital
- It helps to initiate project operations before they generate any revenue.
- Effective for emerging and growing companies because it provides the financial support that such companies need while they are at the beginning of their path.
- The start-up capital covers all costs ranging from infrastructure costs to marketing costs, development costs, maintenance costs, etc.
Types of start-up capital
- Crowdfunding: It is one of the most widely available types of seed capital funding, with more than 500 crowdfunding platforms currently available and providing the support anyone in the world needs to support their idea, product, or project.
- Corporate seed funds: These funds are among the most distinguished sources of seed funding, as large companies support startups because they consider them a source of profit, intellectual property, and talent in the future. Among the most famous large companies that provide such support are emerging companies Apple, Google, and Intel.
- Venture capital: Venture capitalists are investors who provide financing based on several criteria, such as growth rates, market conditions, etc.; in return, they take a part of the equity in the startup they are supporting.
- Convertible securities: This is a type of investment that begins in the form of loans but can be converted into shares later.
- Angel investors: Individuals who provide capital in lieu of stock or convertible debt provide capital to startups when they are at risk during their initial stages.
How to get the start-up capital
In the event that a startup company wants to get the best investment in terms of amount, then you need to search for an active investor in the sector in which that company operates.
After the startup has found the investor it needs, it must prepare all the paperwork and banking details that it needs to complete the transaction and then present them in a distinctive way to the investor so that it can attract him to support it.
The company must provide the necessary data that the investor wants to know in a very accurate manner.
In the end, if the company’s numbers and data seem impressive to the investor, he will want to complete the transaction and provide initial support to the company.
Advantages of seed Capital
- Investors in seed capital are prepared to assume the risks associated with it.
- Investors in seed capital are usually unencumbered by debt or obligations.
- The seed capital provides financial leverage to startups that helps them seize new opportunities and accelerate growth.
- Flexibility in business.
- There is no monthly fee incurred.
- It helps in building social relationships between investors and company owners.
Downsides of seed Capital
- The process of getting paid to start a business with start-up capital takes a lot of time and effort.
- Investors control and make decisions about the company and its operations, which in turn will negatively affect the freedom of entrepreneurs.
- Investors may lack the necessary experience in dealing with the seed capital, which in turn may cause some losses.
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