What is seed money?
Seed money refers to the funding used for startups or enterprises that can come from a variety of sources. It may also be called seed funding or seed capital.
The seed money is intended to fund the early-stage operations of a new business. It can be used for several purposes, such as managing expenses like rent, payroll, insurance, fixed assets, legal and consultancy cost, and many others.
A recent study reveals that 29% of businesses tend to fail in their early operations due to struggle with the seed money capital. That said, this type of funding is especially critical in order for a startup to get off the ground.
Where does seed money come from?
Seed funding may come from several sources. It may come from the entrepreneur’s own savings to establish ownership beforehand. Relatives and friends can also be the source of seed capital, usually with zero or low-interest rates.
Angel investors may also be a source of seed money. These investors are usually existing enterprises, lawyers, doctors, and any entity with a high net worth.
Venture capital companies, meanwhile, are a type of investment firm or big financial institution that invest seed money in exchange for equity.
In contrast with angel investors who fund businesses at the early stages, venture capital firms seek startups with high marketability and huge growth potential.
The valuation of a particular startup may factor in the amount of seed capital since investors’ return on investment (ROI) is at stake. Inventors look at certain values such as business owner capacity or product and service advantages.
Stages of startup funding: When do you get seed money?
It is increasingly common for startups to rely on big investors since it is a feasible option for businesses to grow. There are different stages that a startup goes through in order to obtain funding, and seed money is sought at the early stages.
Here are the main stages of startup funding that you should know.
The earliest stages of a startup are pre-seed and seed funding. At this point. startups only have a concept or model at hand and are primarily striving to get their operations to kick off.
Seed money may come from relatives, close friends, supporters, or even their own savings. This is also the time when startups work to connect with angel investors and venture capitalists.
If the seed funding is successfully raised, startups now enter the development stage to expand more in the market.
The development stage is when funding is channeled toward advertising, technical support, hiring of employees, and other things relevant to business development.
Investors will assess if the company has growing accounts of receivables, inventories, and profits.
The business at this stage has already established increasing sales and profit. Investors continue to support the company for further development of the product and further expansion of the business.
Funding is now less risky and new investors are now entering. This is a good sign that the business is significantly thriving and now enjoying higher valuations.